China loosens banking regulations

China Banking Regulatory Commission (CBRC) has stepped on the path of liberalization in banking sector by announcing a new policy on Friday. China has decided to allow its commercial banks to buy stocks abroad. In a move aimed at curbing the rising liquidity and check soaring forex reserves in the country, the state has given official go-ahead to a policy under which banks and institutional investors can gain exposure to foreign equity funds. Under the fresh guidelines, a commercial bank holding QDIIs (qualified domestic institutional investor certificates) can issue wealth management products that invest in overseas stocks. Chinese commercial banks can invest up to 50 per cent of the funds pooled under the QDII programme. These guidelines were issued by CBRC in a statement on its website on Friday. The long awaited banking liberalization regime is set to unleash some of the vast foreign currency reserves of the country. China holds the largest foreign exchange reserves in the world estimated at 35 trillion Yuan ($4.6 trillion). The new rules will allow foreign fund managers to tap China’s $2,000 billion in retail bank deposits, world’s largest savings pool. The foreign managers will be saved from the trouble of forming mandatory domestic operations. CBRC said that the domestic investors must have at least 300,000 Yuan ($38,900) to purchase financial products. Under the previous QDII system, qualified banks were restricted to buying bonds, money-market products and fixed-income derivatives. Banks are still forbidden from investing in hedge funds, commodity derivatives and securities rated below the investment grade, according to CBRC. Banks are also barred from investing their own money in such investments. Net value of investment in a single stock is capped at 5 per cent of a wealth management product. Analysts claim that the improvement over last year’s QDII will be a ‘win-win’ for both – the mainland investors and the Hong-Kong based financial markets. It will suck the excess liquidity out of the banking sector and enable the country to use its vast reserves of foreign exchange. I believe that the analysts who claim that this may cause a stock market crash would be proven wrong. I think the Chinese investors have not yet grown out of their fear of foreign markets and a whole scale exodus of funds from the market is not even on distant horizons.

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