China’s policy blitz at Lujiazui Forum – what it means for markets, outflows and the yuan
With Chinese financial regulators taking further steps to broaden outbound-investment channels and facilitate cross-border capital flows, analysts see the moves reflecting Beijing’s push for a more “rules-based capital account opening” and greater yuan internationalisation amid the currency’s recent appreciation.
These measures, unveiled on Wednesday at the annual financial gathering known as the Lujiazui Forum, include initiatives to boost offshore trading of yuan-denominated products and the expansion of existing investment schemes.
Analysts suggest that the adjustments help address rising demand from institutional and retail investors for greater access to overseas investment avenues. More crucially, channelling cross-border capital movements through compliant pathways makes it easier for authorities to monitor outflows.
Trading power shift
The liberalisation is “more than boosting the yuan’s international profile”, said Dai Lu, chief analyst at Shanghai-based Guotai Junan Futures. “The pilot trading system equips the PBOC with a new lever to influence the offshore market and even gain the pricing power of the offshore yuan.”
Previously, the central bank’s primary tools to influence offshore rates were issuing central bank bills or instructing Hong Kong subsidiaries of state-owned lenders to sell or buy, she added.
According to the banks’ official announcements, the counterparties included entities from Hong Kong, Singapore and Britain trading offshore yuan against the US dollar, euro, Japanese yen and other currencies.
While Hong Kong is currently the dominant offshore yuan trading centre, increasing activity in the Shanghai free-trade zone could offer an alternative to Hong Kong. Dai noted that the deregulation could also lay the groundwork for the launch of onshore yuan forex futures.
Retail clients are now much more inclined to subscribe to products with the US stocks included
Quotas and outflows
The decision appears to have followed intense lobbying from mainland market participants, according to two sources within the Shanghai municipal government. Over the past three months, they said, major institutional investors such as Bridgewater Associates, a global macro investment firm with an office in Shanghai, had urged the government to expand quotas that had become insufficient.
An investment director at a foreign mutual fund based in Shanghai, speaking on condition of anonymity, said: “We have been talking to the regulators for more QDII quota. A diversified investment portfolio, combining American and mainland equities, could help lift our investment returns.
“More importantly, retail clients are now much more inclined to subscribe to products with the US stocks included.”
SAFE last released new QDII quotas in March, totalling US$5.3 billion, which Bloomberg described as the biggest expansion since 2021.
Beyond those quotas, upcoming measures to facilitate cross-border capital flows include simplified approval procedures for outbound direct investment, as well as overseas bond and loan financing.
Goldman Sachs noted in a report released on Thursday that “this policy emphasis comes against the backdrop of persistent resident demand for foreign assets”. It added that Chinese policymakers were “trying to channel cross-border flows into more compliant routes, which can be monitored easily”.
The company’s capital-flow monitor indicated that outflows picked up last year to US$762 billion, driven mainly by Chinese residents’ purchases of forex assets.
Overnight rates are much more heavily traded compared with other tenors
Interest rate overhaul
The PBOC also signalled a potential shift in its interest rate framework with a focus on the overnight interbank rate, which underlies the vast majority of onshore liquidity transactions. The most immediate adjustment was to compress the interest rate corridor from 70 basis points to 50.
Zhang Candong, a senior analyst with Shanghai-based Orient Futures, said that, “eventually, the PBOC will phase out the seven-day reverse repo rate as its main policy benchmark”.
“Overnight rates are much more heavily traded compared with other tenors,” Zhang explained, and this “marks another step towards a more price-oriented monetary framework”.
Additional reporting by Sylvia Ma