Restart of QDLP, QDIE may hint at Bond Connect inflows
Two Chinese outbound investment programmes that had been frozen for two years have reportedly restarted, in a long-awaited easing of capital controls by the mainland authorities and a possible indicator that big investment inflows are expected.
Shanghai’s qualified domestic limited partner (QDLP) programme and its Shenzhen equivalent, the qualified domestic investment enterprise (QDIE), allow wealthy Chinese investors to buy offshore alternative assets. The mainland authorities shut down these outbound investment channels in late 2015, with a view to supporting the renminbi, which was under intense pressure at the time.
One reason for the restart may be that Beijing is looking to balance expected inflows from Ucits fund managers into Chinese bonds, says Andy Seaman, chief investment officer of London-based asset manager Stratton Street Capital.
Ucits funds, European Union-regulated vehicles, are not yet allowed to invest via Bond Connect, with the key obstacle being concern over the delivery-versus-payment (DVP) system, though there are several others too.
The link, which launched in July last year, allows investors to directly trade on the Chinese interbank bond market through offshore accounts without being subject to investment quotas.
INFLOWS COMING?
The restart of QDLP and QDIE could mean the DVP issue is close to being ironed out, noted Seaman, and that would pave the way for the Dublin and Luxembourg Ucits fund regulators to approve use of Bond Connect.
“If they’re about to get a significant increase in demand from Ucits funds, they need to counterbalance that with [capital] outflows on the other side.”
The moves may also suggest that qualified domestic institutional investor (QDII) programme, which channels Chinese capital into non-renminbi international assets, will also be reopened, he added. The QDIE and QDLP schemes are relatively small in comparison to QDII, which previously had its quota capped at around $90 billion.
REVIVAL
Reuters reported yesterday that QDLP had reopened. And QDIE pilot institutions have been told that the Shenzhen branch of China’s State Administration of Foreign Exchange (Safe) was again allowed to approve investments within the permitted quota, reported Chinese-language daily Ming Pao on January 23, citing Bloomberg.
AsianInvestor could not confirm these reports as the relevant authorities were not immediately available for comment outside working hours in China.
China does not yet have a true DVP process, said Seaman, in that bonds must be delivered and then there is a wait of a few hours before money is received for them. This causes a risk in the event of something going wrong in the interim, he noted.
“The Chinese are well aware of the importance of changing that. Late last year I heard that they are re trying to get this resolved by the first quarter [of 2018].”
Once the Luxembourg and Irish regulators approve China government bonds for inclusion in Ucits funds, Seaman said, that will presumably re-ignite the question of when China will be included in the major global bond indexes offered by the likes of Barclays, Citi and JP Morgan.