QFII changes: how they will affect the market

Author: Ashley Lee | Published: 2 Jul 2012
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The China Securities Regulatory Commission (CSRC) has announced its proposal to relax the rules for its QFII (Qualified Foreign Institutional Investor) programme. Practitioners believe that this may signal the opening of China’s markets.

On June 21, the CSRC announced a long-anticipated raft of changes to the QFII programme. Most notably, it is considering allowing QFII hold up to a 30 percent stake in listed companies.

It has also proposed an easing of the QFII application requirements, requiring assets under management to be over $500 million, instead of $5 billion as originally mandated. Applicants will be required to have two years of operational experience, cut down from five years, which was originally required.

To facilitate trade, QFII will be able to set up securities accounts so that they can access the interbank bond markets.

The QFII policy easing has taken place in stages. In April, the total QFII investment quota was more than doubled from $30 billion to $80 billion.

One Mainland China market participant supported these changes. He said that the QFII’s quota had long been a problem for fund managers. The increase means that they will be more interested in going through the QFII channel to make investments into China.

King & Wood Mallesons partner Xin Zhong noted that far more market players than ever are now being allowed in the arena, which will diversify the community. He expected those with experience in China to apply for more QFII licenses, but said it remained to be seen how smaller QFII licensees would play.

Singapore sovereign investment fund Temasek has applied for a QFII quota of US $700 million to invest in renminbi-denominated A-shares. Meanwhile, Qatar’s sovereign wealth fund has applied for a $5 billion investment quota, far above the $1 billion limit for a single QFII.

The CSRC policy easing is widely seen as China’s means of buoying China’s flagging economic growth. Zhong said that these changes may be to boost market confidence. “Given the current economic climate and the total QFII quota, it is a symbolic move and it will take time to see what could happen,” he said.

But Zhong added that practitioners see this move as one step in a series of steps forward. Rather than announce enormous changes at once, he believed that CSRC needed to test the market first, look back and think about it, and then move to the next change.

The new rules signal the CSRC’s willingness to gradually open up markets for investors. Sources suggest that they are part of a plan to bring PRC and international markets closer, eventually resulting in the internationalisation of the renminbi.