China Opens Its Markets to World—World Says No Thanks

Beijing wants foreign funds to come to China, but pricey markets and weakening yuan keep them away
By GREGOR STUART HUNTER, ANJIE ZHENG and RACHEL ROSENTHAL

If the Chinese government is hoping that a flood of foreign capital would solve its yuan troubles, they will have to wait.
Foreign capital has dribbled into the Shenzhen Stock Exchange since it was opened to all overseas investors last Monday. 

Foreign ownership of Chinese bonds remains a sliver of the total market even after Beijing removed the main curbs on purchases by global fund managers.
That’s dashed hopes for a surge in foreign investment to counteract persistent capital outflows from China, which have seen the yuan drop 6.3% against the dollar this year.
The People’s Bank of China (PBOC) has burned through $940 billion of foreign exchange reserves since mid-2014 as Chinese moved money out of the country and the central bank defended its currency .
“They’re trying desperately to get foreign capital into the country,” said Chris Balding, associate professor of economics at Peking University’s HSBC Business School. 

“Unfortunately, I don’t think there’s the appetite.”
In addition to relieving pressure on the yuan, Beijing also hopes more foreign institutional capital will stabilize Chinese stock markets, which saw a spectacular boom and bust in the summer of 2015.
Opening China’s markets increases the likelihood that index providers such as MSCI and J.P. Morgan will include the country in their global equity and bond benchmarks, potentially attracting billions of dollars in capital.
That won’t happen for the Chinese bond market until late 2017 or later, said J.C. Sambor, deputy head of emerging-market fixed income at BNP Paribas Investment Partners, the asset management arm of France’s biggest bank. 

“All the stars will be aligned in one year,” he said.

HKEX Chairman CK Chow (L) and Hong Kong's Chief Executive Leung Chun-ying (R) launch the Shenzhen-Hong Kong Stock Connect on December 5

One week ago, Chinese authorities threw open the doors of the Shenzhen Stock Exchange to foreign investors, expanding access beyond the hand-picked group of fund managers that had access previously.
But foreign investors are not exactly pouring in. 

Net investment in Shenzhen reached no higher than 21% of the daily 13 billion yuan cap on stock purchases on any given day last week.
Overseas flows failed to reach 1% of daily turnover on the Shenzhen market throughout last week.
Offshore investors see Shenzhen stocks as pricey, and are turned off by the market’s lack of research.

And because the launch has been well flagged for many months, stocks have seen little lift from the opening.
“All of the catalysts have been priced in,” said Frank Tsui, fund manager of Greater China equities at Value Partners in Hong Kong.
At present, only those China stocks listed offshore (principally in Hong Kong and the U.S.) are included in MSCI’s key benchmarks such as its emerging markets index, the most widely tracked gauge of developing market stocks.
MSCI has declined to include A-shares three times since 2014, each time pointing to offshore investors’ heavily restricted access to the market. 

With each market opening, expectations rise that MSCI might now include the stocks in its most tracked benchmarks, the Shenzhen Connect launch being no exception.
“With the Connect, we’re another step closer to MSCI inclusion in the emerging market index,” said Nicole Yuen, head of greater China equities at Credit Suisse.
Elsewhere, China’s government has attempted to attract foreign investors by opening its interbank bond market, where most of the country’s bond trading takes place, allowing unrestricted amounts of buying by foreigners. 

But take-up so far has also been slack.
Few debt managers have a deep knowledge of the onshore bond market, where pricing is distorted by the presumption among local investors that the debt of some firms carries implicit government guarantees, said BNP’s Mr. Sambor.
“It won’t be easy for global emerging-market managers” to get set up to trade this market, he added.
Even getting access to accurate data means putting aside beloved Bloomberg terminals and learning to use the Chinese counterpart, Wind Information, which is mainly in Chinese.

Overseas investors increased their holdings of Chinese bonds to 747.13 billion yuan as at the end of November, compared to 554.2 billion yuan at the start of the year, according to Wind. 

But that’s a mere crumb compared to the size of the Chinese bond market, with outstanding debt of 63.6 trillion yuan.
It’s also done little to halt a sell-off in the past month, which saw yields on 10-year Chinese government bonds hit the highest level in more than a year last week. 

Meanwhile, the extra yield demanded by investors on corporate bonds over government debt rose to the highest level in almost 18 months.
That said, a slow and steady launch for Shenzhen stocks and bond market trading may be what Beijing wants. 

The start of a similar trading link with the Shanghai stock exchange in 2014 was followed within months by a stock buying frenzy as state media encouraged investors to dive into the stock market, ending in an enormous crash. 

Regulators could be forgiven for hoping for less excitable investors this time around.

Foreign Companies Face New Clampdown for Getting Money out of China

Until this week, big companies could ‘sweep’ $50 million out of China; now, cap is equivalent of $5 million.
By JAMES T. AREDDY and LINGLING WEI

Chinese 100-yuan bank notes are seen in a counting machine at a branch of a commercial bank in Beijing. The yuan has weakened against the dollar this year. 

SHANGHAI—Multinational companies are suddenly finding themselves in the crosshairs as China dials back its effort to turn the yuan into a global currency, alarmed that it has accelerated the flight of capital from its shores.
In recent days, according to bankers and officials familiar with the situation, China’s foreign-exchange regulator has instructed banks to sharply limit how much companies move out of the country and into their other operations around the world.
Until this week, it was possible for big companies to “sweep” $50 million worth of yuan or dollars in or out of China with minimal documentation.
Now, these people say, the cap is the equivalent of $5 million, a pittance for the largest corporations.
Beijing is fighting an increasingly vicious cycle of capital outflows that weaken the yuan.
Most dramatically, the State Council, China’s cabinet, intends to tighten scrutiny of overseas acquisitions by domestic companies, The Wall Street Journal reported last week, which could result in deal delays or outright cancellations.
Until now, few of China’s capital-control measures took obvious aim at foreign businesses.
The recent moves effectively erode the yuan’s appeal as a rival to the dollar just two months after the International Monetary Fund added it among its reserve currencies on Oct. 1—an acknowledgment the IMF trusted China to further loosen its grip on the yuan.
Later that month, top financial officers from one of the largest U.S. pharmaceutical makers paid a visit to the Chinese agency that decides how much of its hundreds of millions of dollars deposited in the country can be taken out.
The State Administration of Foreign Exchange had a message for the drugmaker, according to a participant: prepare for “increased friction.”
The blunt talk marked a contrast with a year-earlier visit to the same regulators.
“Things changed 180 degrees,” said the participant.
The clampdown on “sweeping” follows a meeting on cross-border capital flows last week at China’s central bank, where officials expressed alarm that a rising amount of money is exiting as yuan, rather than dollars, according to notes of the gathering reviewed by the Journal.
Before “sweeping” was permitted in an experimental free-trade zone in Shanghai in mid-2013, companies wanting to move cash generated by their China operations faced cumbersome documentation and extra taxes.
The IMF cited “sweeping” among the reasons it considered the yuan credible as a global reserve asset.
The pullback now suggests Chinese authorities are alarmed that so many companies are using it to move yuan directly offshore, such as to Hong Kong, where it can be freely exchanged.

According to notes of its recent meeting, after the central bank determined that the entire net outflow from China during October was in yuan, whereas during the year’s first half amounts were split between yuan and foreign currencies, it decided to instruct commercial banks to all but halt so-called offshoring for the purposes of converting yuan into other currencies.
The meeting notes quote central-bank officials describing the new limits as temporary and their support for the yuan’s internationalization as “unwavering.”
The People’s Bank of China didn’t respond to requests for comment.
Yi Gang, the central bank’s deputy governor, told Xinhua News Agency in an interview published Sunday that China’s inflows and outflows are normal and that money will return as China’s economy rebounds.
Under the rules for “sweeping,” companies must eventually bring back to China the funds they have taken out as part of their corporate cash pooling strategies, though the time frame is flexible.
Bankers say after last month’s U.S. election, some American businesses began “sweeping” more money out on a bet they might need to move funds quickly if the administration of President Donald Trump declares a tax amnesty on U.S. corporate deposits abroad.
“It’s possible, too, that anticipation of tighter capital controls in the future has nudged the treasury operations of multinational companies to move more money out of China,” said Ker Gibbs, an investment banker who is chairman of the American Chamber of Commerce in Shanghai.
China’s largest domestic companies are also feeling the impact of limits on “sweeping.”
“Up until two months ago, we were able to wire millions of renminbi to an offshore affiliate via this program with no problem,” said an official at a big state-owned electricity company, using another name for the yuan.
“But now, our bank has informed us that all such transfers will be reviewed by the foreign-exchange regulator,” the official said.
Chinese authorities blame erosion in the yuan’s value primarily on the dollar’s strengthening, which accelerated after Mr. Trump’s election.
After recently touching lows not seen since mid-2008, the yuan is down 6.2% against the dollar so far this year.
The free-trade zone in Shanghai was designed to test financial reforms, though few of the big plans officially announced, such as trading in crude-oil futures, actually launched.
But “sweeping” sparked excitement.
“Trapped cash is no longer a valid concept,” said Lewis Sun, HSBC’s head of cash management, in a promotional video from the bank that explained the program.
Other bankers also gushed about the liberalization, as did executives of multinational companies including manufacturers TRW Inc. of Michigan, Dover Corp. of Illinois and Minneapolis-based Pentair Inc.
Asked about the recent moves, the companies declined to comment or didn’t respond.
Now, the need to stabilize capital flows and prevent the yuan from a rapid downward spiral trump ambitions for the yuan’s global use.
Last week, Li Keqiang paid his third visit to Shanghai’s free-trade zone.
Hours after his inspection, the local branch of the country’s central bank held a rare press conference to announce a new risk-control system to monitor currency flows through the zone to ensure they are balanced by supporting inflows—a backhanded indication cash had been leaking out.