YUAN liberalization and the opening up of China’s capital account are likely to attract US$400 billion in overseas funds to the nation’s stocks and bonds over the next five years, Morgan Stanley estimates.

    In the most optimistic scenario, inflows could exceed US$1.2 trillion if its markets are fully open, analysts led by Serena Tang wrote in a June 11 research note. A loosening of restrictions could also lead to almost US$6 billion in annual outflows as domestic investors diversify their holdings, while funds moving in and out of the country may increase yuan volatility, they said.

    China is easing capital controls as it pushes for the International Monetary Fund to include the yuan in its basket of reserve currencies at a five-yearly review in October. Freer access to the nation’s financial markets will lead to the nation’s assets being included in global benchmarks tracked by fund managers.

    MSCI Inc. last week deferred a decision on including yuan-denominated stocks in an emerging market gauge. The potential initial weighting of Chinese shares in MSCI’s index would be about 1 percent, which would bring US$3 billion-US$5 billion in inflows, according to Morgan Stanley. That into bonds will be about US$3 billion at the first stage.

    The People’s Bank of China two weeks ago opened an interbank repurchase market to approved foreign lenders and said it will start a cross-border payment system for the yuan by the end of the year. (SD-Agencies)