In February 2016 international institutional investors were granted quota-free access to the $US7.3 trillion onshore interbank bond market.
China also relaxed quota rules for the Qualified Foreign Institutional Investor (QFII) programme, giving license holders an automatic quota based on their AUM, while rules on the Renminbi QFII scheme were relaxed along similar lines in September.
Such efforts are all part of China’s bid to transform the renminbi into a global investment currency — something given an official imprimatur by its inclusion in the reference basket for the IMF’s Special Drawing Rights in October 2016.
By easing quota restrictions authorities aimed to satisfy the demands of providers of global benchmarks for greater liquidity before they include Chinese assets in influential indices.
Such inclusion could in theory dramatically boost inflows to China as investors in benchmark-tracking products would be obliged to buy RMB-denominated assets according to their weightings.
Some estimates suggest the inclusion of Chinese equities in MSCI’s Emerging Markets Index will lead to an initial inflow of around $US20bn, rising to as much as $US180bn if all A-shares are included at their full weight.
However, the events of 2015, in which a collapse in stock prices prompted China’s authorities to introduce emergency measures such as preventing share sales to prop up the market, seriously dampened global fund managers’ enthusiasm about Chinese equities.
The appeal of the onshore bond market, meanwhile, despite superficially attractive yields, is undermined by opaque risk metrics. The yuan’s devaluation since the forex mechanism reform on August 11 2015 (and the official response) have also spooked some investors and called the currency’s liberalisation into question.
Full capital-account opening, interviewees for this series suggested, is unlikely in China before 2020.
Even then, only a minority of fund managers in a recent ANZ/FT Confidential Research poll said it would be a given allocations to China will rise, owing to structural problems facing the economy (such as rising indebtedness) and country risk.
Indeed, liberalisation is not expected by most respondents to be a big driver in increasing asset allocations to Asia in general.
Given recent events, many are either rethinking their mainland approaches or are content for now to watch and wait.
Whichever the direction of flows, fund managers expect the opening of China’s capital account to increase liquidity in Asia.
But some serious questions remain about the pace and scale of this opening, and hence China’s role in regional asset management, amid a more volatile global environment.
Tim Moloney, Global Head of FX Investor Sales, ANZ
This is an edited version of an article that appeared in the 'Signals from the Noise: Distinguishing Hype from Opportunity in Asian Asset Management’ series, produced in collaboration with FT Confidential Research.