China is poised to boost quotas on outbound investment schemes to $100 billion and cut barriers to moving foreign currency in and out of the country in a series of swift but small steps to crank open its tightly controlled capital account.
Sources in close, direct contact with the People's Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC) say reforms are ready to be rushed out over the next 12 months to boost two-way capital flows, drive diversification of business finance and accelerate corporate currency hedging.
There is a window of opportunity and the reformers are trying to get as much through it as quickly as possible, said a source in institutional finance who is in close contact with China's financial authorities.
Beijing took a milestone step in liberalizing its currency regime last week, doubling the daily onshore trading band for the yuan to 1 percent. The move underlined its desire for reforms designed to ease speculative pressures in the economy and rebalance capital flows, while taking the country one step closer to its goal of a basically convertible yuan by 2015.
Relaxing rules on China's Qualified Domestic Institutional Investor (QDII) scheme would aim to raise by $25 billion the amount Chinese residents can pump overseas.
QDII is likely to get a major boost. The CSRC has already got a proposal to simplify the rules and take the overall level to about $100 billion, one source with ties to the PBOC told Reuters, requesting anonymity to avoid repercussions.
The thing to look for is incremental reform rather than big, one-off moves, the source said.
It would follow moves earlier this month on the Qualified Foreign Institutional Investor (QFII) scheme for inbound investments, which hiked quotas by $50 billion to $80 billion.
That fits in well with expectations of banks such as HSBC.
The most likely moves that authorities would like to pursue involve further capital account opening - increasing the channels for cross-border flow of renminbi, both for inflows and outflows, said Dominic Brunning, an FX strategist in Hong Kong.
All the changes which are unfolding serve to relax government controls on China's capital flows and increase the appeal of using the yuan for international transactions, delivering twin advantages of reducing domestic inflation and speculative investment flows while mollifying foreign critics of Beijing's currency regime.
LONG LIST OF REFORMS
The list of potential reforms includes approval for private equity and venture capital firms, boosting capital raising in domestic bond and equity markets, accelerating offshore issuance of yuan-denominated securities and increasing the yearly $50,000 quota on FX purchases by mainland residents.
That is in addition to more complex measures such as those expected to allow a greater role for market forces in the setting of domestic interest rates.
China in January revealed plans to deepen financial reforms, break lending monopolies, encourage private sector capital and advance the convertibility of the yuan in an orderly manner at meeting of top officials at the National Financial Work Conference, held once every five years.
A separate scheme outlined an ambition to turn Shanghai into a global financial centre by 2020, more than doubling non-foreign exchange financial market turnover and enhancing benchmark interbank borrowing mechanisms.
A detailed PBOC study in February provided a potential timeline to ease capital controls over five to 10 years to give foreigners more freedom to buy Chinese assets while allowing direct access by Chinese nationals to overseas property and financial markets.
Then Premier Wen Jiabao last month staked his political legacy on reform to rebalance the economy at China's annual meeting of parliament.
Shortly afterwards, China's cabinet approved a pilot project in the coastal city of Wenzhou that could form the cornerstone of national financial sector reforms. It unveiled plans to create a clutch of new institutions to bring private sector funds into China's state controlled banking system.
The really important question is whether a sudden burst of reform is an indication of an acceleration in the medium-term trajectory or whether it stops abruptly when the window closes. We don't know the answer to that, said the source in institutional finance.
The uncertainty is fuelled by an unfolding political scandal in China that has brought the downfall of Bo Xilai, once widely seen as a contender for a post in China's top leadership which will be decided later this year. The transition will see Wen and President Hu Jintao start to hand over the reins of power.
Bo's removal from office has cast doubt on the likely balance of the powerful nine-member committee while reinforcing - at least temporarily - the view that faster economic reform is needed to keep the world's second-biggest economy on a steady long-term expansion path that delivers social stability.
An article in the official China Securities Journal on Tuesday, penned by the same author of the February PBOC reform timeline, said Beijing had a rare strategic moment to speed up capital account opening.
The regulatory and central banking sources said the appetite of PBOC governor Zhou Xiaochuan and CSRC chief Guo Shuqing for faster-paced financial reforms is meeting like-minded support from Vice Premier Wang Qishan, currently the most junior of four vice premiers but tipped to become number one in the reshuffle.
Regardless of that dynamic, analysts and traders in China's currency markets say the most sensible expectation is for incremental liberalization.
New hedging instruments and changes to currency trading rules, such as moves this week to allow banks to carry short or long dollar positions overnight rather than closing them out at the end of each day, and permitting more banks to take small short FX positions, are the likely scale.
The key for the reforms that are coming are that they promote diversification and more direct access to capital, reducing the government's role, the source with ties to the PBOC said.
There are going to be plenty of changes, but you shouldn't expect major one-off moves, like interest rate liberalization, before the leadership transition is complete.
(Additional reporting by Gabriel Wildau in Shanghai; Editing by Kim Coghill)