BEIJING - China has underscored its intention to open up the country's
financial markets by tripling the investment quota of qualified foreign
institutional investors (QFII) from US$10 billion to $30 billion.
The announcement from the State Administration of Foreign Exchange (SAFE) came
ahead of the 18th US-China Joint Commission on Commerce and Trade meeting on
Tuesday and the third Sino-US Strategic Economic Dialogue, which opens on
Wednesday. The Chinese government can expect to face further calls that it open
up its markets more to overseas investors and
take further action, such as letting it currency appreciate at a faster pace,
to limit growth in its trade surplus. US Treasury Secretary Henry Paulson,
Beijing for the talks, has argued strongly for faster appreciation of the yuan.
The QFII move also came out before the release on Tuesday of China's latest
trade and inflation figures, which showed price increases accelerating to the
quickest in 11 years and the trade surplus growing, adding further to domestic
pressure on government to raise interest rates and let the currency appreciate
faster.
Consumer prices rose 6.9% in November from a year earlier, faster then the 6.5%
gain in country's main inflation measure in October, the statistics bureau
said. The trade surplus climbed 14.7% to $26.3 billion in November from a year
earlier, the customs bureau said today. The 11-month trade surplus with the US
rose to $149.2 billion.
This was the second expansion of the QFII program, which allows foreign
investors to trade in the yuan-denominated A shares while the Chinese currency
remains not fully convertible. The country launched the QFII program in 2002
with a quota ceiling of $4 billion on a trial basis. The previous expansion, in
2005, was $6 billion. However, no foreign institutional investors have acquired
any new quotas since February, when the then $10 billion quota was running low.
Shang Fulin, chairman of the China Securities Regulatory Commission, told
reporters in October that raising the QFII quota was a common understanding
reached at the second Sino-US Strategic Economic Dialogue. On the other hand,
ahead of the Strategic Economic Dialogue, China has warned of "serious harm" to
the bilateral economic and trade ties, if some legislative bills, now before
the US Congress, are passed.
Finance Minister Xie Xuren said that it was "worrying" to see the rising trend
of trade protectionism in the US. He was referring to more than 50 legislative
bills concerning US economic and trade ties with China proposed by some US
Congress members since the beginning of the year.
The SAFE said it would "decide the tempo" of quota issues in line with China's
international payments and the development of the domestic stock market.
"Eligible overseas medium- and long-term investment will be encouraged to
invest in China's capital market," it said.
Reviewing the performance of QFII funds over the past five years, the SAFE said
that the system had facilitated a transformation in Chinese investors'
sophistication, improved risk management, strengthened the global clout of
Chinese capital markets and helped optimize corporate governance. The number of
QFIIs, described by the SAFE as "significant institutional investors," now
totals 49. Their aggregate market capitalization was nearly 200 billion yuan
(about $27.02 billion).
Industry analysts said the government had previously been reluctant to raise
the QFII quota for fear of sparking currency appreciation and concern that the
domestic stock markets were near bubble territory.
Separately from the SAFE announcement, Liu Mingkang, chairman of the China
Banking Regulatory Commission, played down fears of the economy overheating in
comments made at an annual conference sponsored by Caijing Magazine in Beijing
Monday.
"The benchmark Shanghai index has more than tripled from 2003 to this November,
which is still small compared with other BRIC [Brazil, Russia, India, China]
nations. Russian stocks rose nearly 631%, Brazilian stocks 576% and Indian
stocks 596%," he said.
To promote steady development of the financial markets, the SAFE also said that
it would expand channels for local residents to invest abroad and raise the
investment quota for qualified domestic institutional investors (QDII). The
QDII program is designed to allow Chinese investors to trading in overseas
shares as the yuan remains not fully convertible.
"We support more eligible local financial institutions being able to provide
more diversified products for domestic investors, enhance their risk management
and establish new advantages in global competition," said the SAFE in a
statement.
As of end-September, all QDIIs - including banks, funds, insurers and
securities dealers - had acquired investment quotas of $42.17 billion, with an
actual outflow of $10.86 billion.
The benchmark yuan-US dollar exchange rate hit a new high of 7.3872 on November
27, for a cumulative appreciation of nearly 11% since China discontinued the
peg to the greenback in July 2005.
Zhou Xiaochuan, governor of the People's Bank of China, or the central bank,
said on November 18 that if necessary the nation would consider widening the
yuan's floating band.
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