China’s latest attempts at restricting outward investment by its residents show just how nervous policymakers in the world’s second largest economy are about possible capital flight spurred by a broadening Sino-U.S. trade war, Reuters reports.
Beijing has been gradually easing monetary and fiscal policy this year, as it seeks to steer the economy through a period of slowing domestic growth and declining stock markets against the backdrop of escalating trade tensions with Washington.
While the Chinese central bank has tightened its grip on the currency, which is down about 10 percent since the first salvos in the trade war were fired in March, it has refrained from direct intervention on a large scale to support the yuan, also known as the renminbi.
Unobtrusively, though, China has been moving to rein in currency outflows via the handful of overseas investment channels available to mainland investors.
“The last thing the government wants to see is capital stampeding out of China,” said Tang Xiangbin, a foreign exchange analyst at China Minsheng Banking Corp.
Sources say approvals have been put on hold for a niche overseas investment product in Shanghai known as the Qualified Domestic Limited Partnership, or QDLP, scheme. The foreign exchange regulator has also not issued fresh quotas in the past three months under another overseas investment scheme, the Qualified Domestic Institutional Investor, or QDII, data shows. [nL4N1WQ31P]
So far the informal instructions, known as “window guidance”, appear to be a precautionary move. There is hardly any sign of the heavy flight of capital seen previously during the 2015-16 market turmoil.
Yet analysts point to a host of factors that explain China’s conservatism.
While there are still heavy restrictions on how much of money Chinese businesses and retail investors can move overseas, Shanghai’s bond and stock markets are more accessible to foreigners since 2015, thanks to Connect schemes that allow two-way flows between mainland exchanges and Hong Kong. Portfolio flows into China have grown and China’s level of external debt is higher.
Meanwhile, the famed trade surplus the export powerhouse ran with the rest of the world has been shrinking.
Victor Shih, an associate professor of political economy at the University of California, San Diego, says currency devaluation could be an attractive option for China to offset the impact of the trade war.
But he warned the tactic had limits, as it “could create a panic on the renminbi which becomes difficult to control”.