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Investment strategy
February 26, 2021
3 mins

China to take next step in capital account opening

February 26, 2021
3 mins
Ken Peng
Head - Asia Investment Strategy
Shanghai Financial District in fog
SUMMARY

China is taking further steps to welcome in foreign investors and enable its own citizens to invest abroad. We consider the implications for the Chinese currency, its equities and bonds.


  • China is planning to further open up its capital account by allowing more flexibility for domestic individuals to make outbound investments, as well as making China more attractive for foreign investors and issuers. The plans are still under study at financial authorities led by the State Administration of Foreign Exchange (SAFE). The timing is expected to be some time in 2021. 
This potential policy move serves two key purposes:
  •  Alleviate currency appreciation pressures, while the central bank normalizes monetary policy, as noted in the PBOC’s 4Q monetary policy report (MPR).
  •  Facilitate multi-lateral trade and investment agreements, as well as RMB internationalization and capital market opening to make RMB a more globally accepted currency and reduce dependence on USD financing.
Potential impact on markets
  • CNY exchange rate: The impact is likely limited, as the vast majority of FX flows in CNY is by corporates and financial institutions, while individuals’ demand for outflows is limited given relatively strong economic position. As a result, CNY strength is likely to remain until the Fed turns more hawkish or when the USD bear market ends, both still some time off in our view.
  • Equities: Positive for offshore insurance and wealth management, as well as onshore brokers and insurers. But it is likely neutral in terms of overall equity flows, as mainland investors already have access to HK through the equity connect programs, and might not be significant enough for larger markets like the US. Though there may be greater preference for popular consumer brands, electric vehicles and tech names in these markets. 
  • Bonds: There may be some attraction towards property bonds where yields can sometimes be higher in HK than on Mainland, depending on the credit policy cycle. But generally speaking, CNY onshore yields are more attractive and familiar to mainland investors than hard currency offshore varieties.
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