Upcoming reform to trigger more capital inflow to China

SHANGHAI - Major reforms toward the Chinese currency's full convertibility expected in the next five months will encourage more capital inflow into China this year, Deutsche Bank said in a report on Wednesday

The resulting capital inflow will add to the yuan's strength against other currencies and lead to more liquidity to support growth for the world's second largest economy, said the bank's chief China economist Zhang Zhiwei, though he didn't specify what measures will come along.

Overseas investors still face hurdles to expand exposure to China's capital market, though the country has taken measured steps in recent years to loosen grips over its capital account.

China has pledged the make the yuan convertible under capital account this year during the country's annual parliamentary session in March.

While China is on its way to undo more restrictions over capital flowing through its borders, Zhang said regulators will still maintain necessary controls to keep financial risks at bay.

Starting in November, offshore investors based in Hong Kong can invest directly in Chinese stocks listed in Shanghai under a daily quota of 13 billion yuan. A similar program will be launched sometime this year, connecting Hong Kong-based investors to the Shenzhen Stock Exchange.

Zhang said additional capital inflow resulting from further opening of the capital account could also add fuel to a sustained bull-run in China's stock market, whose performance since late last year has sent the Shanghai Composite Index to seven year highs in recent trading days.

The authorities' upcoming moves' to open China's capital account will also raise the yuan's global profile, says the bank, which sees a 70 percent likelihood for the currency to be included into the Special Drawing Right (SDR) basket of the International Monetary Fund by the end of 2016.