China has slowed the expansion of a scheme to attract foreign investment funds into its domestic capital markets, fearing that funds might become a conduit for 'hot money' motivated by currency speculation, reported the Financial Times. HSBC recently won approval for only half the US$100m quota it applied for permission to invest, while an informal request from UBS to increase its US$300m quota was also refused. ING, which applied for a US$100m quota, was not expected to receive approval for the full amount. So far, nine investment banks have gained permits to invest a total of between US$800m and US$900m.
The newspaper commented that the tough line on currency inflows was influenced by the State Administration of Foreign Exchange winning out over the more liberal view of the China Securities Regulatory Commission. Officials also expressed concern that certain investors were putting their money into bonds rather than shares, indicating, they said, a speculative interest in gaining exposure to the yuan, which many analysts expect to appreciate.
Enthusiasm among foreign banks for entering the domestic share market was also being eroded by the increasing notice being paid to restrictive rules on repatriation of funds. Repatriation is banned during the first year of operation and limited to 20 per cent a quarter from the second year.
Sluggish Shanghai delays QDII reforms China has postponed indefinitely a scheme that would have opened the Hong Kong stock market to legal investments by mainland institutions. The Qualified Domestic Institutional Investor (QDII) would have allowed some mainland funds to convert their yuan into hard currency in order to invest in the Hong Kong stock market. But China Securities Regulatory Commission officials feared that it would divert funds away from the languishing Shanghai stock market, depressing prices further.
The move will come as a disappointment to the Hong Kong government, which first proposed the scheme as a way of invigorating the territory's sluggish economy by integrating it more closely with the mainland's.
More broadly, it represents a setback to introducing a more flexible exchange rate mechanism for the yuan and addressing US concerns over China's record US$103bn trade surplus last year. The scheme was conceived as a counterpart to the Qualified Foreign Institutional Investor plan, which opened the flow of foreign funds into Chinese stock markets.