Articles
13 June 2018

China relaxes rules for foreign investors to take money out

China has relaxed rules for foreign investment schemes to take money out of the country in a bid to open up the capital account. But the new rules need to be tested to gain investor confidence

China lifts capital outflow controls to lure inflows

The central bank has relaxed outward remittance rules for two foreign investment schemes in China (namely QFII, qualified foreign institutional investor programme and RQFII, renminbi qualified foreign institutional investor programme). These schemes allow foreign investors to bring money into China and invest in China's equity and bond markets.

In the past, taking money out of China was difficult and there was a lock-in investment period. This has now been dropped though other rules continue to apply. For example, the remitted amount must be taken after tax.

The central bank has introduced these measures to appease foreign investors who had been concerned about investing in the onshore Chinese market because of rules governing when they could take money out. It hopes this will encourage two-way flows of capital.

But foreign investors might not have trust in the policy immediately

But we believe that this relaxation has to be tested, especially at times of rapid capital outflows from onshore to offshore. Between 2014 and 2016, capital controls were applied to outflows and this situation could be repeated.

Unless foreign investors gain more confidence in the ease of taking money out of China, we don't expect a lot of inflows from the QFII and RQFII schemes.

Outflow pressure increases with a weaker yuan

Source: ING, Bloomberg
ING, Bloomberg

Central bank must show that outflows are allowed even when the yuan weakens

As we expect the yuan to weaken further in 2018 to 6.60, outflows from funds operated by QFII and RQFII should arise occasionally. If the central bank can show foreign investors that it is willing to stick to its new outward remittance rules even when the yuan weakens, then more foreign investors will be encouraged to invest in the onshore market.

China will then be able to attract more inflows into the onshore market when sentiment is bullish. MSCI is going to include more A-shares into its funds, which may give demand for these shares a push. If these funds are able to return 1.5% in 2018, they will be able to make a profit that offsets the exchange rate depreciation of 1.4% from our USCNY forecast.

New outward remittance rules could encourage foreign investors to invest in the onshore Chinese market but only if the central bank can give more assurance that these investors can take their money out when they want it. This would ensure a genuine two-way flow of capital, which is a preparatory stage for further liberalising the yuan exchange rate. Eventually, the yuan could float like other major currencies. But the prerequisite is the opening up of the capital market.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).