China expands several outbound investment schemes after yuan’s sharp strengthening

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China is moving to encourage domestic institutional investors to pour more money into foreign capital markets as the yuan strengthens sharply against the US dollar amid accelerating post-pandemic inflows of funds.

The foreign exchange regulator will start issuing $2 billion to $3 billion of Qualified Domestic Institutional Investor (QDII) quotas each quarter and $10 billion for the full year, according to China’s official Xinhua News Agency on Wednesday, citing an official from the State Administration of Foreign Exchange (SAFE).

The annual total would represent a 10 per cent expansion of the program. The agency issued $3.36 billion of new quotas last month, the first in a year and a half.

China will also expand outbound schemes Qualified Domestic Limited Partner (QDLP) and Qualified Domestic Investment Enterprise (QDIE), which are being trialled in Beijing, Shanghai and Shenzhen city, Xinhua reported, without giving a timeline.

The upcoming moves will further meet onshore investors’ need to allocate assets globally, Xinhua said.

The comments came as the yuan is trading at its highest levels in more than two years, fueling expectations that Beijing would move to rein in the surge. The currency climbed as much as 0.55% Wednesday to its strongest since July 2018. The currency gained almost 5% over the past three months.

In addition to dollar weakness, the yuan is being supported by a wide interest-rate premium over the rest of the world. China’s 10-year government bond yield has been trading around 3.2 per cent, bringing the gap versus the yield on US Treasuries to near the highest on record.

The rally has also been aided by the economy’s recovery from the coronavirus fallout. That recovery continued in the third quarter of the year when GDP expanded by 4.9 per cent from a year earlier, accelerating from the previous three months, as consumers shook off their coronavirus caution.

The prospects of a victory by Joe Biden over Donald Trump in the upcoming US presidential election are also supporting the currency. Trump’s trade war with China last year sent the currency to its lowest since 2008.

“The market has probably become overly complacent now, with no risks being priced in properly at all,” said Stephen Chiu, a strategist at Bloomberg Intelligence.

It would be “easy” for Beijing to rein in the advance, he said, adding the government may next relax capital controls to allow more outflows. “While fundamentals support the yuan to keep appreciating in the coming months, one should turn more cautious from a risk-to-reward standpoint.”

Less than two weeks ago China scrapped a two-year rule that made it expensive to bet against the yuan, which was widely interpreted as a tactic to rein in the yuan’s strengthening. While the yuan tumbled the most in nearly seven months afterward, it quickly reversed the losses.

The government had allowed domestic institutional investors to buy more overseas assets in September — which can encourage some capital outflow — but that has also failed to slow the yuan’s appreciation.