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China's overseas investment schemes set to freshen offshore yuan pool
[HONG KONG] China is studying pilot schemes that will allow domestic investors to make overseas investments using the Chinese currency, a move that could pump fresh oxygen into the stagnant offshore yuan pool.
"The central bank is designing RQDII (Renminbi Qualified Domestic Institutional Investor) and QDII2 schemes to enable investment in offshore markets," said Wang Dan, deputy director general in the monetary policy department at the People's Bank of China.
Yuan deposits in Hong Kong, the biggest offshore yuan hub, stood at 937 billion yuan (US$153 billion) at the end of August, the lowest level since February.
The yuan pool expanded much more slowly this year than market participants expected, mainly because of new ways for foreign investors to use yuan in China to buy high-yielding assets, as well as yuan being cheaper in offshore markets.
As an example of foreign investors' interest in onshore yuan assets, the 270 billion yuan Renminbi Qualified Foreign Institutional Investor (RQFII) quota granted to Hong Kong was exhausted in less than three years.
The accumulation of yuan deposits outside of China has for years relied heavily on cross-border trade settlement, with some additional flows from Renminbi overseas direct investment (ODI) and Chinese travellers converting currency overseas.
It worked well in the first few years of the offshore yuan market, given the premium the so-called CNH enjoyed over its onshore CNY counterpart, encouraging companies to bring yuan funds to the former British colony.
However, as the premiums have reversed in the past few months, the measure that allows Chinese investors to use yuan to buy shares and other investment products abroad will no doubt open a crucial new channel for the "redback" to flow into offshore markets.
Offshore yuan reserves will have to reach 11 trillion yuan for the currency to achieve one-third of the US dollar's international status within 15 years, based on the experience of internationalising the dollar, the Hong Kong Financial Services Development Council said in a report.
It is also expected to help balance international payments for the world's second-largest economy, which has recorded surpluses in its current and capital accounts for years.
The surplus in the two accounts amounted to US$80.5 billion and US$77.8 billion, respectively, for the first half of the year, the State Administration of Foreign Exchange (SAFE) said. "The size of overseas assets that mainland China holds is not only smaller than developed countries and some emerging economies, but these assets are highly concentrated in foreign reserves," said Nathan Chow, an analyst at DBS in Hong Kong.