China to Bump Capital Outflow Quota by $10 Billion, Caixin Says

(Bloomberg) -- China is preparing to grant additional quota for funds to invest in securities overseas, Caixin reported, a move that would allow more capital to flow out of the country.

The Qualified Domestic Institutional Investor quota will be bumped by $10 billion in the near term, Caixin said on Thursday, citing an unidentified official from the State Administration of Foreign Exchange. An earlier version of the story had said the QDII would be increased by between $2 billion and $3 billion every quarter, with a cap for annual increases kept at $10 billion. Caixin has since removed those references.

The foreign-exchange regulator didn’t immediately reply to a Bloomberg fax seeking comment on the Caixin report. The QDII quota was last at $107 billion in September, according to SAFE.

The yuan weakened 0.3% to 6.6681 per dollar on Thursday.

A rapid advance in the yuan may give policy makers the confidence to allow more capital to flow out of the country. Though a clear signal, in reality the move would do little to offset the capital that’s currently flowing into China’s onshore bond market. Overseas investors bought more than $100 billion worth of debt in the interbank market this year -- or about 10 times the planned quota increase in Caixin’s report.

The currency on Wednesday rose to the strongest since July 2018 even after the central bank set its daily reference rate weaker than expected. In addition to a falling dollar, the yuan is being underpinned by a wide interest-rate premium over the rest of the world, as well as expectations that a Democrat win in November’s U.S. election would encourage further strength.

SAFE last expanded the quota by $3 billion in late September -- the first enlargement since April 2019 -- just as the yuan completed its best quarter in 12 years versus the dollar. China hasn’t widened the quota for two consecutive months since 2018, and it hasn’t done so regularly since before the yuan was devalued five years ago.

The move “suggests to the market that policy makers want to either slow or stop yuan appreciation by opening an outflow channel,” said Dariusz Kowalczyk, senior emerging-markets strategist at Credit Agricole. “There could be a little bit of a pause in the appreciation as a result of the news, but it will not have a lasting effect. More will need to be done.”

QDII, which was created more than a decade ago, allows onshore institutional investors to buy overseas securities such as stocks and bonds. SAFE used to grant quotas under the scheme prior to a shock devaluation in August 2015. The capital flight that followed prompted Beijing to tighten scrutiny on funds flowing outside its borders, by halting new quota offering under the program and making it harder for mainland individuals to buy foreign exchange.

On Oct. 10, Beijing scrapped a two-year rule that made shorting the currency expensive, a decision that was widely seen as a move to rein in the yuan’s rapid appreciation. While the yuan plunged the day after the rule change, it has erased all losses since then.

Still, Beijing has many other tools at its disposal to rein in the yuan’s ascent. It could issue a string of weaker reference rates, which limit the onshore currency’s moves by 2% on either side, or issue verbal warnings to guide market expectations. It could also ask banks to remove a so-called counter-cyclical factor in their fixing formulas, in effect encouraging them to submit weaker quotes for fixings.

©2020 Bloomberg L.P.

With assistance from Bloomberg