Plans for more lenient foreign investor rules to China’s central banking system signals further opening of financial markets according to a recent Bloomberg article. The new changes would impact the Qualified Foreign Institutional Investor (QFII), which is a program that allows licensed international investors to participate in China’s mainland stock exchanges. First launched in 2002 by the People’s Republic of China, Qualified Foreign Institutional Investor program permitted foreign investors access to its stock exchanges in Shanghai and Shenzhen. Before the installation of the Qualified Foreign Institutional Investor Program, foreign investors were unable to buy or sell shares on China’s stock exchanges because of the country’s capital controls.
With the launch of the QFII program, licensed investors could purchase and sell yuan-denominated “A” shares which are generally only available for purchase by mainland citizens. It should be noted however that foreign access is limited by quotas that determine the amount of money these investors are permitted to invest. According to sources, the QFII program has granted about $81 billion in quotas for overseas investors. The changes to relax limits suggest that the volatility in China’s stock market and the yuan’s exchange rate have encouraged authorities to relax restrictions on foreign investors in order to generate capital inflows.
Institutions would also be allowed to bring in portions of their QFII quotas at different times, the person said. They were given specific QFII quotas and only allowed to bring in an amount equal to that quota in a single transaction.
Interestingly, the changes in leniency represent a direct contrast with authorities’ recent efforts to strengthen restrictions on capital flows as slowing economic growth and a dwindling devaluing currency led to a money exodus about $1 trillion last year, according to Bloomberg.
Singapore Overseas-Chinese Banking Corporation’s financial analyst and economist Tommy Xie stated that even the smallest percentage of China’s 1.37 billion people sending money elsewhere would devastate the country.
“If foreign entities want to move their funds out, they’ll do it no matter if they can do it once a month or every day,” continues Xie, “The top priority for policy makers now is to prevent Chinese individuals and corporates, who are quite pessimistic about the yuan, from sending capital out of the mainland.”
China recently approved over $80bn in QFII quotas and almost 470 bn yuan ($71.4bn) for the Renminbi Qualified Foreign Institutional Investor Program (RQFII) which allows institutions to raise yuan overseas for investment in China.
But local finance experts are not as concerned with foreign investors, who only account for about 3 percent of China’s capital markets, with only QFII, RQFII and exchange link program between Shanghai and Hong Kong playing a role. And though 3 percent is not nothing in China’s $5.3 trillion stock market capitalization, China policy writers are setting their concerns on local investors who are transferring money overseas.
For the time being, the looser limits reveal more about China’s desire to further stimulate their capital markets than anything else. Indications of whether the impact will prove viable are to be determined.