HONG KONG - China has eased restrictions
on the inflow of foreign capital into the
country's securities market. The new rules
governing the qualified foreign institutional
investors (QFII) program, jointly issued by the
China Securities Regulatory Commission (CSRC), the
People's Bank of China and the State
Administration of Foreign Exchange over the
weekend, will come into effect this Friday,
September 1.
Analysts say the revised
rules are apparently aimed at curbing
the
influx of "hot" money from overseas by allowing
more non-speculative foreign capital long-term
investments in China's fledgling securities
markets through the QFII program under the
supervision and control of the authorities
In the absence of a freely convertible
currency, China began to introduce the QFII rules
in early 2002, to allow foreign capital to flow in
under control for investment in the
yuan-denominated A shares on the Shanghai and
Shenzhen stock exchanges. The QFII program, which
officially kicked off in May 2003, enables foreign
investors to trade in the A-share markets, which
were originally only open to domestic investors.
The new rules lower the QFII threshold,
making it possible for more overseas financial
institutions to be qualified investors in the
Chinese securities markets. Currently, to be
qualified as a QFII, an applicant - such as a
fund-management firm, a securities brokerage
house, an insurer or a bank - must have securities
assets worth more than US$10 billion. Now the
asset requirement is slashed by half to $5
billion.
Under the original rules, a
foreign insurance company must be in business for
at least 30 years to be qualified for QFII.
However, the new rules stipulate that a
five-year-old foreign insurer can be accepted as a
QFII.
The new rules also stipulate that
other overseas institutions such as pension funds,
charity funds, and government investment firms,
which have been in business for more than five
years and manage at least $5 billion assets, can
now be eligible for QFII in China.
The new
rules also widen the investment range for QFII
investors to include warrants and funds as new
investment products.
Releasing the rules,
which consist of 37 articles in seven chapters, on
its website, the CSRC says it will also increase
the quota of overseas investment in China's stock
markets. Currently, the total quota for the QFII
program is set at $10 billion. However, the
regulator does not disclose how much the new quota
is.
According to the new rules, the limit
on combined investment of QFII investors in a
single listed company remains at 20%. However, an
overseas strategic investor's holding in a listed
firm is not limited by these rules.
Under
the new rules, QFII investors will be allowed to
open three securities investment accounts with
each of the country's two stock exchanges.
Currently, each QFII investor only opens one
account with each stock exchange in cooperation
with their trustees and local partners.
With the approval by the CSRC of US-based
Stanford University, GE Asset Management Co and
United Overseas Bank of Singapore as QFII
investors in late July, the number of QFII
investors in China now totals 45, of which 39 have
been awarded a combined investment quota of $7.495
billion, about three-quarters of the $10 billion
quota that China has promised to grant to the QFII
program.
China's yuan-denominated A-share
markets, which have witnessed a 50% increase since
late last year, have become more attractive to
overseas investors. Some foreigners invest capital
in A shares with an expectation of yuan's
revaluation.
Analysts say easing
restrictions on QFII will enable more foreign
capital to enter China's securities market
legally, which authorities hope will help curb the
inflow of speculative money. Authorities also hope
the long-term investment of QFII investors will
help facilitate reform and innovation in China's
fledgling capital markets. Early this year,
China also officially kicked off the so-called
qualified domestic institutional investors (QDII)
program, which allows Chinese banks, insurers and
other institutions to invest in overseas
securities while the yuan remains not fully
convertible.
The launches of QFII and QDII
have been seen as important steps in the process
of liberalizing the Chinese currency. As such,
easing restrictions on foreign investment in
China's securities market is a welcome move.
John Ng is a freelance writer
based in Hong Kong.
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