Reserve managers turn sultry eyes towards China China snuck something out last Friday that just might be pretty significant... China's foreign exchange regulator has removed the $1bn limit for foreign sovereign wealth funds, central banks and monetary authorities buying Chinese assets through the Qualified Institutional Investor Programme (QFII). The new regulations, published on the website of the State Administration of Foreign Exchange, did not specify a new top limit, merely that the funds can apply to invest over $1bn. However the total amount of foreign money allowed to enter the domestic stock market remains small, and the new rules do not increase it. The overall net quota for the QFII programme remains at its current $80bn, of which SAFE has only allocated $36bn for use by QFII funds as of November 30. Yup, this is clearly aimed at bringing some economic investment and stability into the country but it might well have an0ther, very serious effect. From Citi's Greg Anderson (our emphasis): The rule change seems to have been written with the idea of allowing foreign SWFs the ability to purchase greater amounts of equities, the biggest impact could come if foreign central banks decide to allocate a fraction of their FX reserve holdings to CNY. If global central banks ex-China decided to allocate just 1% of their reserves to Chinese assets, there could in theory be a wall of USD75bn of new investment in China, which would swamp the new 80bn limit. [the cap of permitted foreign securities holdings] The open question at this point is whether the world's central banks are ready to hold CNY as a reserve asset. In some ways it makes eminent sense. China is the world's biggest exporters, so if import coverage is a reason for holding reserves, this would argue for owning at least a fraction of reserves in CNY. However, foreign debt coverage (for either government or private debt) is more often cited as a rationale for holding reserves than import coverage. Foreigners don't issue debt in CNY yet, so this factor argues for keeping CNY holdings small, as does the credit rating. But while these factors argue for extremely low holdings, the shift to a 1% that we mentioned could still be market altering to a variety of G10 exchange rates if it were to occur. Thing is, reserve managers are desperate to diversify their holdings out of euro and dollar - the former suffering from obvious structural and existential problems, the latter already accounting for an overwhelming amount of reserves. That has lead to the smaller currencies out there getting serious attention. The Australian and Canadian dollars in particular are being very well loved while the Skandies and the Mexican peso are also being wooed with more violent intent than they are used to. Poor dears. So, if a serious amount of renminbi is soon to come available, it's not hard to see a correspondingly serious amount of (mostly QE) splashy cash flowing towards it - that 1 per cent seems pretty reasonable. But, before we get too excited, we'll head back to Anderson for some sobriety: We are reluctant to make too big of a deal of these changes until we get a handle on how central bank reserve desks are likely to react. However, we do think this factor bears watching. It is clearly positive for Asian currencies and negative for European and American counterparts, but the magnitude of impact could range from extremely small on up. And we should also remember, thanks to Euromoney, that only five sovereign-level investors - GIC, Temasek, the Swiss National Bank, the Hong Kong Monetary Authority and Quata - have hit the old $1bn ceiling. FT Alphaville IMF to include Aussie and Canadian dollar in reserves data - Money Supply