In the news: China proposes to fix VAT rebates, the Shenzhen-Hong Kong Stock Connect launches and the PBOC tightens offshore renminbi loan controls

Shenzhen link off to slow start

The Hong Kong-Shenzhen Stock Connect that began on Monday drew a muted response from investors. By the end of the first trading day, foreign investors had put Rmb2.7 billion ($394 million) into the Shenzhen market—Just 21% of the northbound daily limit—while Chinese investors bought Rmb850 million ($123 million) of Hong Kong stocks—only 8% of the southbound quota. The Shenzhen Stock Exchange, which lists some of the country's fastest-growing companies in technology, pharmaceuticals and consumer goods sectors, offers investors a more dynamic set of stocks than its Shanghai counterpart, dominated more by state-owned enterprises like banks and oil companies. Interestingly, however, the latter's link with Hong Kong that opened two years ago saw two-thirds of the daily quota for Shanghai shares being used up in the first 45 minutes of trading. Higher valuations in Shenzhen are seen as dissuading foreign investors from piling into the city's equity market, with dual-listed shares often available at cheaper rates in Hong Kong. The renminbi's depreciation—it has weakened 3% against the dollar so far this quarter—hasn't helped either, with overseas funds wary of putting in too much money.

China cracks down on offshore renminbi loans

The People's Bank of China (PBOC) has reportedly drawn up new guidelines to strengthen inspection of domestic companies that make renminbi loans overseas, as part of the latest move to curb speculative shifting of the currency amid short-term depreciation pressures. Lenders must register with local foreign exchange regulators before issuing loans abroad, and the amount of loans should not exceed 30% of their net assets. This will apparently be the first time that the central bank has set a ceiling amount for renminbi-denominated loans that lenders issue overseas. A Morgan Stanley report said that cross-border renminbi flows picked up strongly to an average of $28 billion per month through October this year, in contrast with declining offshore renminbi deposits, meaning that the outflowing currency has been converted rather than promoting its offshore use. Controls and regulations may be further tightened in the event of a U.S. Federal Reserve rate hike. These steps all come after last week's confirmation by the PBOC and NDRC that the government would heighten monitoring of outbound investments and SAFE telling banks to flag any cross-border capital-account transactions over Rmb5 million. China needs to tighten curbs on money outflows, with the threat of a Fed rate increase and the uncertainties of a Donald Trump administration threatening to prompt a vicious cycle of currency depreciation causing outflows that would in turn pressure the renminbi further.

More VAT changes to come

China will give fixed rebates on value-added taxes (VATs) to local governments beginning this year, according to the State Council, in a bid to beef up their fiscal strength while tightening rules to hold them responsible for debt obligations. The central government has previously handed 30% of annual increases in VAT revenue back to local authorities, which critics say has failed to narrow regional income gaps as advanced regions usually had faster VAT growth and enjoyed larger rebates. It comes as China completes its overhaul of its business tax regime this year to reduce corporate burdens and boost the service industry. But the move had led to a decline in tax revenue for local governments. The vice minister of finance said that China will simplify VAT rates, adding that the current tax system's many tiers cause confusion in policy implementation and impede fair competition. Current rates have four levels that range from 6% to 17%. While the final rollout of the VAT reform this year to all industries—bringing the construction, real estate, consumer and financial sectors into the scheme—was a long-awaited development, the gaps and difficulties in implementation show that the changes aren't over just yet.

Shenzhen link off to slow start

The Hong Kong-Shenzhen Stock Connect that began on Monday drew a muted response from investors. By the end of the first trading day, foreign investors had put Rmb2.7 billion ($394 million) into the Shenzhen market—Just 21% of the northbound daily limit—while Chinese investors bought Rmb850 million ($123 million) of Hong Kong stocks—only 8% of the southbound quota. The Shenzhen Stock Exchange, which lists some of the country's fastest-growing companies in technology, pharmaceuticals and consumer goods sectors, offers investors a more dynamic set of stocks than its Shanghai counterpart, dominated more by state-owned enterprises like banks and oil companies. Interestingly, however, the latter's link with Hong Kong that opened two years ago saw two-thirds of the daily quota for Shanghai shares being used up in the first 45 minutes of trading. Higher valuations in Shenzhen are seen as dissuading foreign investors from piling into the city's equity market, with dual-listed shares often available at cheaper rates in Hong Kong. The renminbi's depreciation—it has weakened 3% against the dollar so far this quarter—hasn't helped either, with overseas funds wary of putting in too much money.

China cracks down on offshore renminbi loans

The People's Bank of China (PBOC) has reportedly drawn up new guidelines to strengthen inspection of domestic companies that make renminbi loans overseas, as part of the latest move to curb speculative shifting of the currency amid short-term depreciation pressures. Lenders must register with local foreign exchange regulators before issuing loans abroad, and the amount of loans should not exceed 30% of their net assets. This will apparently be the first time that the central bank has set a ceiling amount for renminbi-denominated loans that lenders issue overseas. A Morgan Stanley report said that cross-border renminbi flows picked up strongly to an average of $28 billion per month through October this year, in contrast with declining offshore renminbi deposits, meaning that the outflowing currency has been converted rather than promoting its offshore use. Controls and regulations may be further tightened in the event of a U.S. Federal Reserve rate hike. These steps all come after last week's confirmation by the PBOC and NDRC that the government would heighten monitoring of outbound investments and SAFE telling banks to flag any cross-border capital-account transactions over Rmb5 million. China needs to tighten curbs on money outflows, with the threat of a Fed rate increase and the uncertainties of a Donald Trump administration threatening to prompt a vicious cycle of currency depreciation causing outflows that would in turn pressure the renminbi further.

In the news: China proposes to fix VAT rebates, the Shenzhen-Hong Kong Stock Connect launches and the PBOC tightens offshore renminbi loan controls

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