China eases rules on for­eign funds in bid for MSCI in­clu­sion

The Pak Banker - - BUSINESS -

China re­laxed re­stric­tions on for­eign funds as pol­icy mak­ers seek to gain en­try to MSCI Inc.'s global stock in­dexes and bol­ster the na­tion's fi­nan­cial mar­kets af­ter record cap­i­tal out­flows.

The State Ad­min­is­tra­tion of For­eign Ex­change said fund man­agers ap­proved un­der its Qual­i­fied For­eign In­sti­tu­tional In­vestor pro­gram will no longer need to ap­ply for quo­tas, with max­i­mum al­lo­ca­tions in­stead be­ing linked to as­sets un­der man­age­ment and sub­ject to a ceil­ing of $5 bil­lion. Open-ended funds will also be able to shift money in and out of the na­tion's stocks on a daily ba­sis.

Chi­nese au­thor­i­ties have been push- ing for an MSCI en­dorse­ment -- send­ing a del­e­ga­tion of reg­u­la­tors to Europe and the U.S. last year to make the case for in­clu­sion -- as Pres­i­dent Xi Jin­ping's govern­ment seeks to el­e­vate the sta­tus of main­land mar­kets on the world stage and make the yuan a more in­ter­na­tional cur­rency. At­tract­ing for­eign cap­i­tal has taken on greater ur­gency in re­cent months af­ter the yuan weak­ened and lo­cal shares tum­bled, though an­a­lysts cau­tioned that Thurs­day's rule change is un­likely to at­tract ma­jor in­flows any time soon and doesn't guar­an­tee MSCI in­clu­sion.

"They want more dol­lars to come into China," said Tim Con­don, head of Asian re­search at ING Groep NV in Sin­ga­pore. "China risk aver­sion is el­e­vated due to un­cer­tainty about for­eign-ex­change pol­icy so I ex­pect lit­tle short-run im­pact from the mea­sure. As cur­rency un­cer­tainty fades, the move will be pos­i­tive for eq­ui­ties and fixed in­come." While the eas­ing ad­dresses some of the is­sues high­lighted by MSCI, re­main­ing curbs in­clude lim­its on the repa­tri­a­tion of as­sets. SAFE also said it re­tains the au­thor­ity to ad­just rules for out­flows based on mar­ket con­di­tions.

The in­dex provider de­cided to leave China's do­mes­tic shares out of its equity gauges in June, say­ing it would work with the coun­try's reg­u­la­tors to es­tab­lish poli­cies that re­solve the "re­main­ing ac­ces­si­bil­ity is­sues." Those in­cluded giv­ing in­vestors quo­tas com­men­su­rate with the size of their as­sets un­der man­age­ment, im­prove­ments in liq­uid­ity and fur­ther clar­i­fi­ca­tion of share-own­er­ship rules.

Chia Chin-ping, a Hong Kong-based man­ag­ing di­rec­tor at MSCI, didn't im­me­di­ately re­spond to calls. Volatil­ity in China's stocks and cur­rency is likely to be an­other ob­sta­cle, ac­cord­ing to Xia Le, Hong Kong-based chief Asia econ­o­mist at Banco Bil­bao Viz­caya Ar­gen­taria SA.

The bench­mark Shang­hai Com­pos­ite In­dex has tum­bled 22 per­cent this year, mak­ing it the world's worst per­former, as traders un­wound bullish bets on con­cern val­u­a­tions were too high given the eco­nomic slow­down. The cen­tral bank has stepped up in­ter­ven­tion in the for­eign- ex­change mar­ket over the past month and tight­ened cap­i­tal con­trols af­ter the yuan slumped to a five-year low. The cost of in­sur­ing Chi­nese sov­er­eign debt against de­fault climbed to the high­est level on Wed­nes­day since a record cash crunch in June 2013.

"The new rule makes it eas­ier for for­eign in­sti­tu­tions to move their funds in and out of China, which was one of the hur­dles thwart­ing an in­clu­sion last year," Xia said. "How­ever, the chance for an in­clu­sion is not sig­nif­i­cant this year, even though this change is in place, be­cause China's fi­nan­cial mar­kets will likely con­tinue to be highly volatile in the near term."

The pre­vi­ous cap on in­sti­tu­tional in­vest­ments was $1 bil­lion, al­though of­fi­cials had al­ready al­lowed that limit to be breached when they gave Fi­delity In­vest­ments Man­age­ment (Hong Kong) Ltd. a $1.2 bil­lion quota in 2015. QFII funds can now be pulled from China af­ter three months, down from a year pre­vi­ously, pro­vided the net with­drawal in a month doesn't ex­ceed 20 per­cent of as­sets held at the end of the pre­vi­ous year, SAFE said.

For Meng Xiaon­ing, pres­i­dent of Tian­feng Se­cu­ri­ties Co.'s Hong Kong unit, more work needs to be done to sat­isfy in­ter­na­tional money man­agers. "I don't think the new rule will di­rectly pro­mote A shares' in­clu­sion into the MSCI in­dex," Meng said. "There are still a lot of things to be done in terms of le­gal frame­work and mar­ket in­fra­struc­ture."

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