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UPDATE 1-China grants fresh quota for outbound investment scheme as yuan firms

(Adds comments and background)

SHANGHAI, Sept 24 (Reuters) - China’s foreign exchange regulator granted fresh quotas under its outbound Qualified Domestic Institutional Investor (QDII) scheme for the first time since April 2019, official data showed.

The $3.36 billion worth of quotas was granted to 18 institutions under the QDII scheme, allowing them to invest in offshore financial markets, data from the foreign exchange regulator showed late on Wednesday.

The move by the State Administration of Foreign Exchange (SAFE) comes as the yuan has strengthened against the dollar over the past weeks amid accelerating foreign money inflows and a recovering economy.

Global index provider FTSE Russell is about to make its review on whether to include Chinese government bonds in its World Government Bond Index (WGBI) later this week.

Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said the QDII quota approval coincided with the previous quota grant when Chinese government and policy bank bonds were added to Bloomberg Barclays Global Aggregate Bond Index last April.

“Global bond index inclusion could naturally prompt capital inflows, while granting more QDII quota to allow outflows at the same time could make capital flows more balancing,” Cheung said.

The yuan could continue to trend higher, so China can appropriately loosen its grip on outbound flows and guide overseas asset allocation by domestic institutions in an orderly manner, the official Securities Journal reported on Thursday.

The yuan has gained more than 5% against the dollar since late May, and is at its strongest level since mid-2019.

Many officials and market watchers have begun to warn about the risk of further rapid appreciation, though China’s exports have been surprisingly resilient so far, rising three straight months through August.

A former central bank official said last week that China’s exchange rate regime does not need to be fundamentally changed, but the country should closely monitor large short-term capital inflows and the risk of rapid yuan appreciation.

Many market participants also expect some adjustments to the country’s foreign exchange policy if the authorities start to feel uncomfortable with the strong yuan.

China’s total QDII quota stood at $107.34 billion as of Sept. 23, compared with $103.98 billion the previous month.

Beijing has stepped up efforts to open its capital markets to foreigners but has kept tight control over outbound flows. (Reporting by Samuel Shen, Winni Zhou and Andrew Galbraith; Editing by Sam Holmes and Kim Coghill)

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