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China's Wealth Management Connect scheme, which will allow residents of the country's southern economic powerhouse to invest in cross-border wealth management products, is likely to begin to operate in the second half of 2021 as moves to further open the Chinese capital account accelerate over the next five years, policy advisors told MNI.
Free trade zones in Shanghai and Hainan could be added to the Wealth Management pilot scheme, which will permit residents of nine cities in Guangdong province to buy investment products sold by banks in Hong Kong and Macau and vice versa, said He Haifeng, director of the Institute of Financial Policy at the Chinese Academy of Social Sciences.
With cross-boundary payments carried out in yuan via the offshore forex market, Wealth Management Connect will add to China's campaign to promote more international use of the yuan, said He, noting that the use of yuan settlements will reduce exchange rate risk, despite the slightly higher volatility of the offshore rate. Total fund flows under the scheme are capped at CNY150 billion in each direction, according to draft rules released by the People's Bank of China last month.
Under its 14th Five-Year Plan, China is looking to deepen channels between its financial markets and those of the rest of the world by 2025, and officials are now moving to cater to the needs of the growing pool of domestic investors needing to manage their individual wealth after earlier schemes aimed at institutional investors, He said. A State Administration of Foreign Exchange official said in a recent article that the country's top FX regulator will study the feasibility of allowing individuals to invest in overseas securities and insurance using their annual FX purchase quota of USD50,000.
PRESSURE VALVE FOR YUAN
Allowing more capital outflows is also increasingly important for the PBOC in order to counter pressure on the yuan to appreciate, now that it has retreated from regular currency intervention, He noted, adding that if Wealth Management Connect starts operating this year it might make sense for regulators to permit southbound flows from Guangdong into Hong Kong and Macao before flows in the other direction are permitted.
Only last week the central bank allotted a new USD10.3 billion quota for Qualified Domestic Institutional Investors to use abroad, the largest sum so far authorised, following yuan strength.
But He expects relatively modest fund flows into foreign wealth management products via the southbound link at this stage, as individual domestic investors accustomed to a closed market and capital controls will be unfamiliar with the offering. China needs to do more to educate investors, He said, noting that subdued post-pandemic spending may also restrain early flows.
Cumulative net outflow via the Shanghai-Hong Kong Stock Connect, was no more than CNY500 billion by the end of 2020, equivalent to less than 2% of domestic savings, noted Guan Tao, global chief economist at the BOC International CO., LTD. While most of this was towards Hong Kong, Chinese investors at an information disadvantage in foreign markets tend to be reluctant to allocate local currency financial assets overseas, he said. Nonetheless, officials must be careful not to allow excessive outflows as they open the current account, said Guan, a former official at the SAFE.
It will be crucial that opening up does not adversely affect China's balance of payment or drain foreign reserves from current levels, said He. While China's foreign reserves, which stood at over USD3.2 trillion at the end of May, are the largest in the world, He said the country should be aware of risks from financial volatility and currency fluctuation caused by climate change.