Foreign investors get $50 billion boost
May 04, 2012 | BY
clpstaff &clp articles &The CSRC has raised the amount available to qualified foreign institutional investors to $80 billion. The $50 billion increase is the largest since the launch of the pilot programme in 2002.
The qualified foreign institutional investor (QFII) programme allows investors to buy Chinese securities, stocks and bonds. It targets long-term investors such as insurance companies, pension funds, asset managers, securities firms and banks.
When China joined the World Trade Organization (WTO) back in 2001, the government pledged that it would award $30 billion in QFII quotas by 2013, which it has now surpassed. The decision to more than double the amount is a strong sign that the government and CSRC are committed to further opening up the country's capital markets.
“There is also an overwhelming demand from foreign investors looking to Chinese securities amid the existing Euro financial problems and the expected slow US recovery,” said Hubert Tse, a partner at Boss & Young specialising in QFIIs. The increase comes on the back of poor performance of Chinese A shares in 2010 and 2011.
With slowing exports and a cooling property market, an increase in foreign investment could boost the country's economic development. Reports state that Chinese economic growth will slow to less than 8% for the first time in years.
“China is trying to bring more liquidity into the market in a bid to restore investor confidence in the local stock market,” said Tse. The move also underlines the country's commitment to making local financial markets more international with a surge of foreign investment.
The increase also signals further liberalisation of China's capital accounts. In order for China to become a global economic power like the US and Europe, the government believes such liberalisation is necessary to achieve full convertibility of the RMB.
From the beginning of the year until March 9, the CSRC approved 19 QFII licences as well as granting a record high of $2.9 billion in quotas. This is already more than in 2011, when the total of QFII quotas was $1.9 billion.
The CSRC is also speeding up the QFII approval process and granting increasingly large quotas to foreign investors. “While 2011 approvals were taking up to six months to process, most recently the time period has been shortened to two months,” added Tse.
The State Administration of Foreign Exchange (SAFE) has also been awarding larger quotas of $300 million instead of its customary $100 million. The Hong Kong Monetary Authority, Cathay Bank, Kuwait Investment Authority and Bank of Korea were all awarded $300 million last year.
“It remains to be seen how well this will all work and whether larger quota increases will continue to be handed out by the SCRC in the coming months,” said Tse. However, this is a positive and encouraging sign to foreign investors looking to tap Chinese A shares for the first time, he added.
The $50 billion cash injection combined with faster approval times and larger quota awards all signal China's commitment to drawing long-term foreign capital. This capital has the power to reform the country's financial markets, accelerate cross-border investments and make the RMB even more international.
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