UPDATE 1-China curbs QFII dollar inflows to fight hot money
Wed September 17, 2003 05:44 AM ET
(Recasts, adds comments from SAFE, analysts, market source)
SHANGHAI/HONG KONG, Sept 17 (Reuters) - China is curbing dollar investment inflows through a scheme to let foreign players into its domestic markets, which market sources said on Wednesday was the latest attempt to relieve upward pressure on the yuan.
China's forex regulator said it had granted smaller investment quotas under a Qualified Foreign Institutional Investor (QFII) scheme, which admitted eighth member ING ING.AS on Wednesday and lets investors into the main stock and debt markets.
"We have indeed given less quotas than applied for by some QFII investors in line with market conditions," a spokeswoman for the State Administration of Foreign Exchange told Reuters.
"But using these cases as evidence to say China is defending the yuan is too arbitrary," the SAFE spokeswoman said.
However, market sources said regulators were worried about an estimated influx of $20-30 billion of "hot money" from speculators betting on an imminent yuan revaluation.
They said the inflow was creating pressure on the yuan to strengthen, which China would not like to see in the near term.
"The government is concerned about hot money coming in -- that is true. So, that sort of worry will translate into various fiscal and other activities that they can monitor, including QFII," a market source told Reuters.
The source added that Beijing's clampdown on QFII quotas was not surprising, and that regulators in Taiwan had made similar policy shifts after that market introduced a QFII scheme.
"Whether the quota will get more relaxed later, I don't know. This is only one of the many policy factors that will go into how much quota they will grant and when they will grant it," the source added.
Regulators have granted $875 million in quotas under QFII alone, which is due to flow into a stock market with 1,200 listed companies and into treasury and corporate debt markets over the next few months.
The United States and Japan say they would like a firmer yuan, saying its value now gives China an unfair trade advantage. China has said it favours a stable foreign exchange regime, afraid of retarding exports that are powering its strong growth.
"A influx of QFII investment is likely to add upward pressure on the currency in the near term. That's why regulators are tightening supervision over the quotas," analyst Simon Wang of Xiangcai Securities told Reuters.
"They're also trying to protect the fledging Chinese stock markets from purely speculative buying."
HOT MONEY, HOT TOPIC
Last week, SAFE granted to Deutsche Bank AG DBKGn.DE and HSBC Holdings Plc HSBA.L 0005.HK a smaller-than-expected investment quota of just $50 million each, the official China Securities Journal quoted market sources as saying.
Deutsche had wanted $200 million and HSBC wanted $100 million, but regulators reduced the quota amid concerns about speculative capital, the newspaper quoted market sources as saying.
"It's the first time authorities have handed out smaller quotas than had been applied for," the newspaper reported.
"To prevent a flood of hot money into China in anticipation of a yuan revaluation, the authorities appear to be getting stricter on the supervision of QFII quotas," it said.
ING Bank NV said on Wednesday it had won initial approval to invest at least $50 million under QFII, only the eighth global name to be let in under a milestone scheme launched last year.
The company would now apply for investment quotas from SAFE before trading in debt and the yuan-denominated A-share market -- Asia's second biggest bourse, after Japan with a market value of $500 billion.
ING has appointed Standard Chartered STAN.L to act as a custodian under the QFII programme, and named China Merchants Securities Company Ltd and the China Securities Company Ltd as their two local brokers in Shanghai and Shenzhen, respectively.
Before QFII, foreigners could only trade hard currency B-shares, a relatively small $11 billion market.
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