China will give a 250 billion yuan ($38 billion) investment quota to the U.S., the largest after Hong Kong, as the Asian nation increases efforts to broaden use of the yuan overseas and lure capital back to the mainland.
The Chinese currency quota will be allocated under the renminbi qualified foreign institutional investor program, the People's Bank of China Deputy Governor Yi Gang said at a Tuesday briefing in Beijing on the sidelines of the two-day U.S.-China Strategic and Economic Dialogue. This is the first time China has given the quota to the U.S., which allows overseas institutions to use the yuan raised offshore to invest in onshore capital markets. China also selected an American bank to clear yuan transactions outside of the mainland.
Chinese authorities have been intensifying efforts to liberalize its capital markets before a decision by MSCI this month on whether to allow the nation's yuan-denominated shares into its global indexes. Measures include relaxing controls over foreign investors' access to its domestic markets and scrapping quota controls over the interbank bond market. With an estimated $1 trillion in capital flowing out of the nation in the past year, the government is seeking to stabilize the yuan before it joins the International Monetary Fund's reserve basket of currencies this fall.
U.S. President Barack Obama and his Chinese counterpart Xi Jinping agreed in Washington last year to further strengthen financial cooperation between the two nations. A string of yuan trading hubs outside the mainland has been established, while U.S. finance and industry leaders have set up a group aimed at allowing banks to make or receive yuan payments.
“Building on President Xi's visit to Washington last fall, both sides agreed on a policy framework for the private sector to enhance RMB trading and clearing capacity in the United States,” U.S. Treasury Secretary Jacob J. Lew said in Beijing on Tuesday. “This will support the competitiveness of the U.S. financial and corporate sectors and improve U.S. investors' access to China's onshore capital markets.”
Getting U.S. investors on board might not be an easy task. China's currency, bonds and equities all fell for a second straight month in May — the first time that's happened since at least 2006, according to data compiled by Bloomberg. The benchmark Shanghai Composite index has tumbled 42% over the past year amid concern slowing economic growth will hurt profits.
The RQFII announcement “means that a U.S.-based investor onshore can buy China's assets without routing through an offshore entity,” said Raymond Yeung, a senior economist with Australia & New Zealand Banking Group in Hong Kong. “The chances for Chinese assets to be admitted into MSCI go higher. It is positive for the RMB to become a global currency.”
The State Administration of Foreign Exchange granted a total of 502 billion yuan in RQFII quotas as of the end of May, with Hong Kong getting 270 billion yuan, meeting the cap set by the PBOC. More than a dozen nations and regions have been granted quotas.
There will be a yuan clearing network in the U.S. in the future, the PBOC's Mr. Yi said. One Chinese bank and one American lender have been picked as clearing banks for the Chinese currency, Vice Premier Wang Yang said Tuesday.
“Given the net outflow in China's capital account, China naturally welcomes more inflows, which can be seen in a series of market-opening measures so far this year,” said Li Liuyang, Shanghai-based market analyst at Bank of Tokyo-Mitsubishi UFJ (China) Ltd. “Chinese policymakers would want to see more offshore yuan flow back — that's the policy direction. Looking forward, if the quota in the U.S. is quickly used, then China is likely to extend yuan trading hours to cover the U.S. hours.”