China: Beijing to allow increase in foreign capital flowing into Chinese securities

Updated On: Apr 04, 2012

In a move to open up the country’s capital markets, the China Securities Regulatory Commission (CSRC) announced early this week that international fund managers will be allowed to invest a total of 80 billion yuan in China’s onshore capital markets, more than twice the amount of the previous limit of 30 billion yuan. This will come in the form of an expansion of its Qualified Foreign Institutional Investor Scheme (QFII).

In addition, the Renminbi Qualified Foreign Institutional Investor Scheme (RQFII), which allows foreign investors to raise funds in Hong Kong to be used for investments back in China, will be raised by 50 billion yuan. The scheme was set up to promote the use of the yuan in cross-border trade and investment, and thus reduce reliance on the US dollar.

According to the CSRC statement, the increase in the QFII quota is meant to “satisfy foreign investors’ investment demands, and move forward in promoting the stable development and opening of the domestic capital markets”.

Previously, World Bank President Robert Zoellick said that China would have to rely more on markets and the private sector, because its export-oriented model would not be sustainable in the long run. More capital inflows into China’s market might boost the country’s sagging market, which performed badly last year.

In an effort to further liberalize its capital account, Beijing also announced that it was considering a pilot programme that would allow citizens from the city of Wenzhou to invest abroad directly. China’s former central bank governor, Dai Xianglong, speaking at a conference, commented that “China should speed up renminbi convertibility on the capital account to make it become a currency that can be used for the purpose of investment”.

Analysts believe that increasing the QFII quota will help foreign investors, but point out that existing restrictions with regards to transparency and repatriation of money make the situation far from ideal. The Chinese government has hinted that it may make more drastic reforms to its market policies should the QFII and the RQFII schemes work well.

Report: China raises foreign investment quota [Wall Street Journal, 3 April 2012]

Report: China to let in more foreign investment [Financial Times, 3 April 2012]

Report: China to expand foreign investment quota to $80 bln [Reuters, 3 April 2012]

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