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

By Reuters/Kevin Yao   June 7, 2016 | 04:01 am PT
China gives U.S. investment quota for first time to deepen financial ties
Chinese President Xi Jinping (right) shakes hands with U.S. Secretary of State John Kerry prior to a meeting at the Great Hall of the People in Beijing, June 7, 2016. Photo by Reuters/Saul Loeb
China said it 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, deepening financial ties and interdependence between the world's two largest economies.

Chinese officials also repeatedly pledged in two days of talks with their 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.

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 program allows financial institutions to use offshore yuan to buy securities in mainland China, including stocks, bonds and money market investments.

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 on Tuesday.

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.

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

The quota is the first granted to the United States under the scheme and is the largest given to a single jurisdiction after Hong Kong. Under the system, U.S. financial institutions would apply to use part of the quota.

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.

Chinese 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 China's 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 program was launched in 2011.

China's central bank said in February it would allow all kinds 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 internationalization of the yuan currency would be market-oriented.

U.S. Treasury Secretary Jack 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.

U.S. financial services firms will have increased access to China and legal, corporate and financial regulatory reforms will increase investors' participation in China's financial markets, Lew also said.

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

"Both sides reiterated the allocation of IMF quotas should be shifted towards emerging markets and developing countries," he said. ($1 = 6.5712 Chinese yuan renminbi)

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