China opens door wider to foreign
funds By Sally Wang
China, keen to attract more institutional
investors into the yuan-denominated A-share
market, is expanding its foreign institutional
investor (QFII) program, which allows foreign
investors to trade A shares while the Chinese
currency remains not fully convertible.
The State Administration of Foreign
Exchange (SAFE), China's foreign exchange
watchdog, has recently granted a foreign sovereign
wealth fund a QFII license, the first of its kind
granted in more than one year.
Hu
Xiaolian, director of SAFE, and deputy governor of
the People's Bank of China (PBoC) or central bank,
released the news at a press conference last week
on the sidelines of the annual session of the
National People's Congress. She declined to
disclose the
name of
the institutional investor or the quota granted
for its A-share investment.
Two sources
identified the sovereign wealth fund as the
Norwegian Government Pension Fund - Global,
familiarly known as the Oil Fund. They said the
fund had been given a quota of US$200 million to
invest in China's stock market. Investing the
nation's oil and gas income in foreign stocks and
bonds, the Oil Fund is one of the world's biggest
sovereign wealth funds.
If officially
announced, it would be the first time that a new
QFII fund has been approved since October, 2006.
China suspended QFII approvals the following
February.
China launched the QFII program
in November 2002 to give foreign capital access to
the country's securities market, until then
completely off-limits to foreigners. QFIIs trade
in A-shares via special accounts opened at
designated custodian banks.
The program
started on a trial basis with a quota ceiling of
$4 billion, which was increased to $10 billion in
2005. However, no foreign institutional investors
has acquired any new quota since February 2007,
when the $10 billion quota was almost used up.
Under pressure, particularly from the
United States, for China to further open its
financial markets, the government last December
announced its plan to triple the QFII quota to $30
billion. The announcement was made on the eve of
the 18th US-China Joint Commission on Commerce and
Trade and the third Sino-US Strategic Economic
Dialogue.
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.
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.
Hu's
announcement last week is believed the first step
in implementing the expansion. Thus, the Norwegian
fund will be the first to take a share from the
$20 billion expanded quota.
A total of 52
foreign institutions had received QFII licenses
(three not granted quotas yet) by the end of 2007,
with the amount they can invest ranging from $50
million to $800 million, with a total of $9.995
billion, reaching the then $10 billion ceiling.
Despite the commitment to expand the QFII
quota to $30 billion, Hu said there was no
timetable for the expansion, as many factors
should be taken into consideration, including the
balance of China's international payments.
Analysts say this suggests SAFE is worried that if
the quota is granted in a short time, the inflow
of large amounts of QFII funds would further boost
China's foreign exchange reserves, which are
already growing very fast, increasing the pressure
on yuan revaluation.
They say the new QFII
move may rather be seen as a gesture by the
Chinese government to bolster the current sluggish
A-share market.
A large amount of A shares
restricted from trading in the market will be
"liberated" or allowed to be traded this year and
next. If their holders decide to sell these shares
in a rush, huge amounts of money will be needed to
sustain share prices and hence to stabilize the
market. QFII funds might be an important financial
source needed for this purpose, said a market
analyst based in Shanghai.
The QFIIs,
described by the SAFE as "significant
institutional investors", have become as a whole
the second-largest institutional investors after
domestic securities funds. QFIIs had an aggregate
market capitalization of nearly 200 billion yuan
(US$28 billion) by the end of 2007, which more
than doubled the QFIIs' market value of 97.1
billion yuan in the A-share market at the end of
2006.
"It is a good thing for the capital
market to encourage more qualified overseas
institutions to make long-term investments in
China's stock market, and the opening of financial
markets to foreign investors is now an
irresistible trend," said Dong Chao, manager of a
joint-venture fund management company based in
Shanghai
The move seems to have renewed
xenophobic feelings among many Chinese small
investors and some market analysts, who say the
move benefits foreigners who can buy Chinese
shares cheap, given the current low prices, and
sell them later to make profits.
However,
retail investor Lan Dake in Shenzhen has a
different view of the QFII scheme. "At such a time
[with the market remaining sluggish] giving access
to new foreign investors only serves their
interests, in sacrifice of the interests of
numerous small domestic investors."
Lan
said the government is helping foreign investors
to make money by opening the fledgling A-share
market when the benchmark Shanghai composite index
is at such a low point, while most domestic small
investors and institutional investors are deeply
trapped.
Lan's remarks reflect many small
investors' views on QFIIs. Talks about the
"conspiracy" by QFIIs to manipulate the market
have been heard now and then. Each time after
QFIIs expressed pessimistic opinions on the
outlook of the A-share market, the market would
drop, and QFIIs then increased their share
holdings, said a story published recently by 21st
Century Business Herald, a leading Chinese
business newspaper based in Guangzhou, provincial
capital of Guangdong.
"They just make
money and gradually and quietly leave our market,"
said Lan.
While many analysts believe the
capital market is too unpredictable to guarantee
any investors' profits, some others think that
QFIIs have better experience and more money to
virtually manipulate the market.
Sally Wang is a
freelance writer based in mainland China.
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