The Chairman of China Securities Regulatory Commission (similar to the U.S. SEC) said that China can increase by 10-fold the size of the two main channels by which foreign investors buy mainland financial assets. It can, Guo Shuqing said, increase quotas under the Qualified Foreign Institutional Investors and the Renminbi Qualified Foreign Institutional Investors. The latter would make it easier for the yuan in Hong Kong (CNH) to be used to purchase Chinese securities.
This hint helped lift China shares by over 3%, their largest gain in a month. The Shanghai Composite's 3% rise brings the gain to 19% off the multi-year low near 1949 (the year of China's Revolution) in early December.
China has gradually eased some capital market access rules. At the end of last year, China removed a ceiling on sovereign wealth funds and central bank's ownership of Chinese securities. It also indicated it will launch an experimental program that would make it easier for some to buy foreign stocks and bonds.
Separately, China State Administration of Foreign Exchange (SAFE) indicated that it establish a new office that will channel some of the more than $3.3 trillion of reserves into supporting Chinese companies' foreign direct investment. Data suggest Chinese companies are rapidly expanding their overseas presence. Direct investment rose by a quarter in the Jan-Nov 2012 period.
These developments say nothing about the near-term direction of the yuan. The dollar fell about 3% against the yuan in the second half of 2012 and has since consolidated mostly between CNY6.21 and CNY6.24, with a brief and shallow push through CNY6.25 in mid-December. We suspect, if risk comes off, the dollar can recover to re-test those mid-December highs.
Some observers have suggested that through the yen's depreciation, it will export inflation to China. The higher inflation would be a reason that officials will angle for a stronger yuan.
We are skeptical. The main factor behind the recent jump in Chinese inflation was vegetables and pork and is clearly more weather than currency related. Japan has no inflation to export. The persistence of deflation is one of the drivers behind the LDP push for a weaker yen.
The macro-economic consideration of a weaker yen is about competitiveness. Just as Chinese officials do not want to see the U.S. dollar decline, they do not want their regional rival (Chinese and Japanese fighter jets were shadowing each other in the region of the disputed islands) to gain a competitive advantage by depreciating the yen.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.