China gives U.S. investment quota for first time to deepen financial ties

BEIJING (Reuters) - China will give the United States a 250 billion yuan ($38 billion) investment quota for the first time to buy Chinese stocks, bonds and other assets, officials said on Tuesday, deepening financial ties and interdependence between the world’s two largest economies.

Yi Gang, Vice Governor of the People's Bank of China, answers a question at a news conference on the sidelines of the National People's Congress (NPC), China's parliament, in Beijing, China, March 12, 2016. REUTERS/Jason Lee

China has given such quota allocations to several countries, including the UK, France and Singapore, but this would be the biggest given to a single jurisdiction after Hong Kong.

Chinese officials also repeatedly pledged in two days of talks with U.S. counterparts that they saw no need for sustained weakening of the yuan currency, which many investors fear could shock the already sluggish U.S. and global economies and roil financial markets as happened in January.

The moves will allow Beijing to pursue its ambition of making the yuan a more widely used global currency, while giving U.S. investors greater access to China’s domestic markets.

A central bank vice governor, Yi Gang, announced the quota at the bilateral Strategic and Economic Dialogue talks in Beijing, without providing further details such as a timeframe.

“We believe the U.S. market is very important, so we granted 250 billion yuan in RQFII quotas to the United States,” he said.

The Renminbi Qualified Foreign Institutional Investor programme, which was set up in late 2011, allows overseas financial institutions to use offshore yuan to buy securities in mainland China, including stocks, bonds and money market investments.

“The ability to do RMB transactions in the United States will be a real advantage, to small firms in particular and to large businesses that are not financial businesses,” U.S. Treasury Secretary Jack Lew said on Tuesday.

“It will make it easier, it will make it cheaper,” he said.

China and the United States will also each pick a qualified bank to conduct yuan clearing business in the United States, Vice Premier Wang Yang said.

The new quota will significantly expand the RQFII programme, under which 501.77 billion yuan had been allocated as of May.

The quota, which financial institutions will apply to use, is the first granted to the United States.

Ivan Shi, head of research at Shanghai-based fund consultancy Z-Ben Advisors, said the move also increased the chances that global investment index compiler MSCI will include Chinese shares in its index, a decision that could come next week, as it broadens foreign access to China’s stock market.

“But its implementation depends on how widely the yuan is used in the U.S. and how much interest U.S. investors have toward Chinese stocks and bonds,” he added.

China’s regulators have been pushing to expand foreign investors’ access to domestic financial markets to make its markets broader and attract more capital inflows.

But foreign interest has waned after a near meltdown in Chinese equity markets last year and subsequent heavy-handed official intervention to shore them up.

China’s cooling economy, growing debt levels and anxiety over its currency policy have also kept investors at bay.

Some analysts said the quota move appeared to be largely symbolic, as many others channels for investing in Chinese assets have opened up since the RQFII programme was launched in 2011.

China’s central bank said in February it would allow all types of financial institutions that are registered outside the country to buy bonds in the interbank market and would scrap quotas for medium- and long-term investors.

Yi said on Tuesday that internationalisation of the yuan currency would be market-oriented.

Lew said during the talks that China was committed to continuing “market-oriented exchange rate reform that allows for two-way flexibility” of its yuan currency.

In a statement following the talks, the U.S. Treasury said China agreed to allow foreign companies to have bigger equity stakes in domestic securities and fund management companies.

China also committed to welcoming qualified foreign firms and joint ventures to apply to engage in the private securities fund management business, including secondary market trading of securities, Treasury said.

The optimal window to make progress on a U.S.-China bilateral investment treaty was before the G20 leaders meeting in September, he said.

Aside from discussions about the internationalisation of the yuan, China and the United States also agreed to push forward reforms at the International Monetary Fund to increase quotas for emerging economies, which determine their voting powers in the organisation and access to financing.

“Both sides reiterated the allocation of IMF quotas should be shifted towards emerging markets and developing countries,” Lew said.

($1 = 6.5712 Chinese yuan renminbi)

Additional reporting by Samuel Shen, Lindsay Dunsmuir and Jason Lange; Writing by Elias Glenn and Sue-Lin Wong; Editing by Will Waterman and Dan Grebler