With much fanfare, London was this week announced as the second location that can take yuan circulating offshore and invest back into the mainland. Investors, however, are unlikely to rush to take part – at least not in the short term.
On Tuesday, China said it would grant investment firms in London a US$13.1 billion (RMB80 billion) quota to invest in the mainland stock and bond markets along with some other monetary instruments. To date, only Hong Kong has enjoyed the privilege.
China’s capital account is still largely closed to the outside world. Global investors looking to buy mainland securities must apply to one of two programs that allows cash outside of the country to flow into its markets. Renminbi Qualified Foreign Institutional Investor (RQFII) status, which China promised London this week, allows qualified investors such as commercial banks to put yuan sitting overseas back into the mainland market.
Another program, QFII, allows for investments not denominated in yuan. Hong Kong by and large leads the offshore yuan market with about RMB700 billion in yuan deposits.
Permission for London to join RQFII was no surprise. In July, China’s securities regulator marked out London and Singapore as leading candidates. Taiwan, where transactions can now be settled in Chinese yuan, is also in line for a RQFII quota.
Plenty of pomp surrounded the announcement this week, made during UK finance minister George Osborne’s visit to Beijing. But perhaps the UK’s economy will benefit more from Chinese investment in a huge “airport city” project in Manchester or nuclear power plant construction than yuan trading. That’s because interest in QFII and RQFII has waned recently.
One major reason for the lack of interest is the poor state of China’s securities market. The Shanghai Stock Exchange was one of the worst performing markets in the world last year. The securities regulator has maintained a ban on IPOs for about a year after many Chinese firms inflated their valuations upon listing. Some insiders have remarked that the investment quotas are meaningless because global investors simply aren’t interested in Chinese securities at present.
More recently, a quick and unexpected tightening on liquidity by China’s central bank roiled markets and spooked investors.
“The recent response to QFII or RQFII product subscription has not been that strong. One reason is after the June liquidity crunch the market has been slightly more cautious,” Becky Liu, a senior rates strategist at Standard Chartered, said from Hong Kong.
Hong Kong’s investment quotas are also far from maxed out. Global funds truly interested in putting offshore yuan back into the mainland market would already be doing it through the territory.
Another reason an RQFII quota of RMB80 billion means little at present is that there is only about RMB100 billion in the city’s market. Investors would have to spend 80% of the quota to make use of the full quota at present. Singapore’s offshore yuan market has a similar valuation.
A more positive signal for offshore yuan and mainland investment is the turmoil in the US over hitting a “debt ceiling”, which, among other things could greatly hurt the value of assets denominated in dollars.
“With all of the talks over the debt ceiling going on in the US, some investors will actually choose renminbi as a safe haven to gradually diversify from dollar investments,” Liu said. After a period of uncertainty, the Chinese government has also allowed the yuan to appreciate, hitting a new high this week. If the trend continues, interest could revive in renminbi investments.