China may open capital accounts by 2015

By Paul Mackintosh - 27/02/12

The People’s Bank of China has just signalled an initiative that many private equity professionals have long been waiting for: the liberalisation of China’s capital controls. If the just-published three-step plan from the bank, and the supporting statements by its officials, are to be believed, China may deliver on recent announcements to formally open its capital accounts by 2015, ending the reign of the State Administration of Foreign Exchange (SAFE). This follows new rules on the implementation of the pilot program for investing in PRC securities and fund management companies as Renminbi Qualified Foreign Institutional Investors (RQFIIs). And since a visit to Hong Kong by Vice Premier Li Keqiang in August, private equity GPs (general partners) had been waiting and hoping for reforms to facilitate FDI (foreign direct investment) and acquisitions – all part of the step-by-step internationalisation of the RMB.

All this recalls the excitement among Western LPs (limited partners) at the prospect of getting a share of the RMB action through the Qualified Foreign Limited Partner (QFLP) scheme promulgated in Shanghai. As of December 2011, the Shanghai Municipal Government had granted QFLP licenses to 14 private equity investors locally, including the Blackstone Group, the Carlyle Group, CLSA, DT Capital Partners and Nomura Holdings, for a total quota of US$1.5 billion.

Some international investors are looking on PRC investments as a currency appreciation play: bets against the expected rise of the RMB. But the appreciation already under way, coupled with a weaker dollar and high entry valuations – to say nothing of competition from local RMB funds – if anything crimped the prospects for dollar-denominated funds going into China, with any RMB appreciation benefits on the asset value only to come later. Interesting, then, to see that RMB appreciation might be on the point of stalling, according to reports from some government-connected economists. With China running only a claimed 2% trade surplus and macroeconomic commentary now shifting towards a soft landing for the Middle Kingdom’s soaring growth engine, one way bets on China growth may face an interesting future. Furthermore, the stall in RMB appreciation is expected to hit over the next couple of years:  exactly the exit window for many investments done in the pre-crisis heyday of 2007-08. And it also coincides with the arrival of the RMB- denominated Great Wall of local private equity money, some of it with easier returns hurdles than the dollar funds. The RMB appreciation story may yet prove to be anything but easy money.