Private Foreign Currency to be invested abroad

Securities firms are likely to be able to invest privately held hard foreign currency abroad under a new government rule. The new rule, which the government began public consultation on yesterday, should encourage capital outflow and reduce pressure for the yuan to appreciate.

"Securities firms can set out an asset management plan to raise tradable foreign currency domestically and invest it in financial products abroad," says the draft rule, released yesterday by the China Securities Regulatory Commission (CSRC).

The rule has been posted on the regulator's website and public opinion will be sought until July 31.

"The rule will create diverse investment opportunities for domestic capital. Instead of being limited to the Chinese market, investors can now buy into international markets," said Li Yongsen, professor with Renmin University of China. "It will increase investors' investment portfolios and diminish risks."

"Hong Kong will be the first targeted market for domestic brokerages, due to its close connection with the mainland," said Jiang Jianrong, an analyst with Shanghai-based Shenyin Wanguo Securities.

The rule, while bringing brokerages more business, will also be a new challenge for securities firms, as domestic firms will have to familiarize themselves with the overseas market, in which many of them lack experience.

"Leading firms such as China International Capital Co Ltd and CITIC Securities will have an advantage in such business, as they have some overseas experience," said Li.
Besides allowing brokerages to raise funds for overseas investment, the draft rule also includes regulations for brokerages' asset management business.

"Brokerages can set out asset management plans to invest in stocks, bonds market and funds," the draft rule says.

"Asset management is actually a private equity activity, as brokerages are banned from advertising for clients through mass media," said Jiang, adding that the rule will be the country's first regulation on private equity activities.

The CSRC did allow some leading brokerages to pioneer asset management schemes as early as October 2004. Following the release of the rule, all qualified securities firms will be able to follow suit.

The rule, by encouraging capital outflows, is widely believed to be able to alleviate the yuan's pressure to appreciate.

The renminbi has gained 1.6 per cent since the government revalued it on July 21, 2005.

And the policy to allow qualified foreign institutional investors to invest in the domestic capital market in 2002, the so-called QFII scheme, also increased the supply of foreign currency, putting pressure on the yuan to rise.

To strike a balance, the government has relaxed controls on capital outflow, allowing fund management firms and insurers to invest abroad under the so-called qualified domestic institutional investors, or QDII, programme.

The State Administration of Foreign Exchange recently gave Bank of China, the Industrial and Commercial Bank of China Ltd and Bank of East Asia Ltd quotas worth a combined US$4.8 billion to convert yuan deposits into foreign currency for overseas investment on July 21.

"Now a new channel for foreign currency outflow will alleviate the pressure to appreciate the yuan," said Li.

The domestic stock market closed mostly flat yesterday despite the central bank's announcement of another 0.5 percentage point hike in bank reserve requirements on Friday.

The benchmark Shanghai composite index closed at 1,665.944 points, up 0.04 of a per cent, after falling as much as 2 per cent during the morning.

Turnover in Shanghai A shares was 17.2 billion yuan (US$2.2 billion).

According to Jiang, yesterday's draft rule also encouraged more subscriptions in the latest initial public offerings (IPOs) as it gave no limitations on how much such asset management plans can subscribe to in an IPO.

She emphasized that it was another break as brokerages will now be allowed to invest in stocks of the companies they underwrite, which was previously banned by the regulator.

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