China signals real financial opening up, but will it follow through?

Idea of allowing people to change yuan into other currencies and then decide what offshore assets to buy is revolutionary
Immediate monetary impact of a relaxation would be limited because many affluent Chinese have invested overseas anyway

Zhou Xin

Published: 5:15pm, 22 Feb 2021

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A Chinese foreign exchange official said on Friday that Beijing will “study” a plan to allow all mainland residents to invest in offshore securities and insurance policies up to an annual limit of US$50,000.

It is hard to overestimate the plan’s significance over the long run, if it goes ahead.

For decades, China has barred its people from freely investing in offshore financial assets. Every Chinese citizen is given a nominal annual quota of US$50,000 to change yuan into foreign currencies for purposes such as overseas travel or education expenses, but purchases of stocks, bonds, insurance policies and properties remain off limits – at least on paper.

The restrictions have created a vibrant underground market for smuggling money out of China. Beijing has sometimes turned a blind eye to such outflows when it feels there was too much hot money flowing into domestic markets, putting pressure on the yuan to rise. But it could be ruthless if it felt an exodus of funds was threatening financial stability.

China already has certain tightly controlled mechanisms for onshore investors to access offshore assets, including the Stock Connect link between Hong Kong and Shanghai. But for a mainland investor, such schemes usually do not involve real money exchanges – putting yuan in and taking yuan out.

China urges markets to focus on rates, not liquidity, to avoid ‘misunderstanding’ of monetary policies

Therefore, the idea of allowing people to change yuan into other currencies and then decide for themselves what offshore assets to buy is revolutionary. It would mark a milestone in China’s foreign exchange deregulation and create an institutionalised channel for mainland investors to participate directly in global financial markets. It may create China’s answer to “Mrs Watanabe” – the proverbial Japanese housewife who made a splash in international markets in the 1980s by investing her family’s savings – and it could even result in a powerful coalition of Chinese individual investors in the next GameStop-like battle on Wall Street.

The immediate monetary impact of this relaxation, however, will be limited because many affluent Chinese have invested overseas anyway.

China’s foreign exchange regulators will need a strong political blessing to move forward and prove that the plan will not create systemic risks. In 2007, China announced it would try a “through-train” plan to allow investors in Tianjin and Shenzhen to invest in Hong Kong stocks, but that plan was scrapped the same year as Beijing found huge amounts of money flowed to Shenzhen.

Beijing could shelve this new plan if it sees a danger.