China Mulls Easing Capital Controls on Offshore Investments

China Mulls Easing Capital Controls on Offshore Investments

China is considering relaxing restrictions to allow its citizens to invest in securities outside its mainland in a bid to facilitate two-way capital flows as it opens its own capital markets to more foreign participation.

The State Administration of Foreign Exchange will conduct a study to see if it can allow domestic investors to use their $50,000 annual forex quota for purchases of securities and insurance offshore, Ye Haisheng, director of its capital account management department, wrote in an article published in China Forex Magazine. It also plans to remove the quota limit for individuals who take part in stock incentive programs of offshore-listed firms.

If implemented, the move would be a big leap in China’s push for a two-way opening of its financial markets. The country bars individuals from using their forex quota for direct offshore investments, but China is becoming more relaxed about capital flows as the yuan has strengthened about 10% from May 2020.

It would be a boon for brokerages such as Up Fintech Holding Ltd. and Futu Holdings Ltd. Many Chinese investors have already been ignoring the restrictions by setting up offshore brokerage accounts to invest in initial public offerings of Chinese firms in Hong Kong and elsewhere.

To cater to a growing need for offshore asset allocation, China is also looking at boosting the quota for its Qualified Domestic Institutional Investors program in a “timely” manner, according to the article. Restrictions may be eased in the derivatives market, where futures trading is limited to hedging for financial institutions.

Still, the regulator pledged to step up monitoring of cross-border flows and crack down on violations against its forex rules, Ye said, adding challenges are “inevitable” in the course of opening up capital accounts.

©2021 Bloomberg L.P.

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