China halts overseas investment schemes
Beijing has mothballed two pioneering outbound investment schemes, according to people with knowledge of the situation, in its latest bid to stem capital outflows and shore up the renminbi.
The halt in the allotment of quotas reflects fears over the massive amount of cash — some economists estimate up to $1tn last year — that has left the country through official and unofficial channels as economic growth slows and the renminbi continues to depreciate.
The schemes were part of liberalisation moves designed to facilitate overseas investment in China and allow domestic funds to buy foreign securities. But last August’s renminbi devaluation and subsequent capital flight has triggered a spate of reversals and watering-down of schemes that enable China’s currency to leave the country.
The casualties include the so-called Qualified Domestic Limited Partner scheme, designed to allow foreign asset managers — including the likes of BlackRock and Aberdeen Asset Management — in Shanghai’s free trade zone to sell overseas investment products directly to wealthy Chinese clients.
The two asset managers were among global groups that received licences last year but have waited in some cases more than six months for quotas.
The State Administration of Foreign Exchange has also delayed the launch of an updated programme for domestic investors to invest in equities abroad, known as the Qualified Domestic Institutional Investor 2 scheme, or QDII2.
According to one person familiar with the matter, the suspension was clear but not an official measure. It was “part of Safe’s effort to monitor capital flows”, he said.
Another person familiar with the scheme said Safe was in prolonged negotiations with the asset managers on how to salvage the licences in a fresh format.
Seven global asset managers were issued licences starting in July last year but none of them have been issued the quota necessary to launch the business, data compiled by Shanghai-based consultancy Z-Ben Advisors show.
The QDLP programme was originally launched in 2013 and allowed hedge funds to raise capital onshore for investment offshore. Since then, 10 foreign asset managers with wholly owned companies in Shanghai’s free trade zone have received licences and upwards of $1bn in quotas to raise onshore capital for other alternative asset classes such as property and infrastructure.
But conflicting regulation of the scheme meant that, while asset managers in the QDLP pilot secured licences from China’s securities regulator and a local bureau called the Shanghai Finance Office, they were stymied by Safe withholding quota approval.
Safe’s efforts to stem capital flows have seen it halt foreign exchange businesses at three foreign banks in recent months. Domestic asset managers have also reported that Safe stopped issuing new quotas for the Qualified Domestic Institutional Investor (QDII) licence, allowing local companies to invest abroad.
“I think the quota suspension is a result of a broader regulatory push for capital controls,” said Chris Powers, a senior consultant at Z-Ben. “The same rationale can be applied to the . . . QDII2 programme, which likely has been suspended due to Safe’s reluctance to open additional outbound channels.”
When announced last year, the new QDLP scheme was hailed as a breakthrough for traditional asset managers looking for direct access to mainland wealth. It was also seen as a strong competitor to cross-border investment channels based in Hong Kong.
BlackRock declined to comment on the allotment of quota but a spokesperson said: “BlackRock continues to work closely with the authorities in connection with the QDLP programme.”
Aberdeen did not respond to questions concerning its quota. Safe declined to comment.