China Allows Individuals To Invest Abroad

China has started a trial to let individuals invest abroad directly for the first time and introduced a tool to manage forex risks, moves aimed at liberalizing its foreign exchange policy.

However, the impact of both changes in the near term may hinge on the yuan's pace of appreciation, analysts said. China's forex regulator, the State Administration of Foreign Exchange, said Monday it recently approved a trial allowing individuals to invest directly in overseas securities products as part of efforts to widen investment channels and better balance the country's external payments. Separately, the People's Bank of China said effective Friday, it allowed local institutions to trade yuan currency swaps that include interest payments in the interbank market, a tool that could allow for greater yuan exchange rate flexibility. China authorized some institutions to trade foreign-exchange swaps on the interbank market in April 2006, but those swaps don't include interest payments. Both moves buttress the direction of China's forex policy reforms: working toward eventual convertibility on China's capital account and making the yuan exchange rate more flexible and more responsive to market forces. The overseas investment trial is part of a move toward liberalizing China's capital account, said HSBC economist Qu Hongbin. "Two-way capital flow is very important for exchange rate reform and (the yuan's) convertibility," Qu said. Analysts said the yuan's controlled and gradual appreciation might hurt the popularity of yuan currency swaps, which help hedge against forex risks amid volatile trading conditions. While the overseas investment trial and its potential expansion could hurt domestic share markets, individuals expecting the yuan to appreciate might prefer to invest domestically, especially since local share prices have been surging. For these reasons, investment products offered under the Qualified Domestic Institutional Investor program - until now the only way for individuals to invest abroad - haven't been popular. "Given the yuan's long-term uptrend and China's economic boom, investors would be reluctant to withdraw from mainland shares, backed by yuan-denominated assets, to invest in the neighboring market," said Zhang Gang, a strategist at Central China Securities.

Overseas Invest Trial Starts In Tianjin

In the first stage of the trial, individuals are allowed to invest in securities on the Hong Kong bourse through Bank of China Ltd.'s (3988.HK) Tianjin branch and Hong Kong-based BOCI Securities Ltd., which is controlled by Bank of China Ltd.'s wholly owned investment-banking unit, BOC International Holdings, SAFE said in statements on its Web site. SAFE added the trial will start in the Tianjin Binhai New Area, where China is testing some forex reforms. But Bank of China branches elsewhere can set up overseas investment accounts for individuals if the branches have a tie-up arrangement with the Tianjin branch, said SAFE. This potentially offers individuals across the country the opportunity to invest in overseas securities products. Hong Kong BOCI can't offer financing, as well as overseas deposit and withdrawal services, to clients, said SAFE. It added individuals can only sell securities products that they hold in their accounts, or buy products using funds in their accounts. "Starting the trial for overseas securities investment by individuals will help in the orderly growth of such investments and in the accumulation of experience in preventing and managing risks," said SAFE. It added that a US$50,000 quota on the amount of foreign currencies locals can buy each year won't apply to direct investments in overseas securities products by individuals. The PBOC said earlier Monday that local institutions qualified to trade in the interbank market for forex forwards will be allowed to trade yuan currency swaps with interest payments using fixed or floating interest rates. The rules took effect Friday and mark a widening in the range of forex-management tools. The PBOC said it is introducing yuan currency swaps with interest payments to "develop the country's financial system, grow the forex market, and satisfy the demand from participants in the economy to manage forex risks." The rules allow yuan currency swaps with the U.S. dollar, the euro, the Japanese yen, the Hong Kong dollar, and the U.K. pound, PBOC said in a statement posted on its Web site. The central bank said the parties negotiating interest rates for the yuan component of currency swaps should use either the PBOC's benchmark lending and deposit rates or the benchmark rate in the interbank market as a reference. It said the parties should negotiate the reference rate for the foreign-currency component. On the impact of the new yuan currency swaps, Sean Callow, a currency strategist with Westpac in Singapore, said: "So long as you have these tiny ranges that we typically have on the currency, then the motivation for people to try something new is pretty limited, and it's tough to get...enough counter parties involved that you can have a really functioning market." A Beijing-based analyst with a local bank said China's bond market is likely to ignore the introduction of the new instrument as it is mainly aimed at helping investors protect themselves against foreign-exchange risks.