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June 29, 2012

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Home » Supplement » Lujiazui finance fair

Foreign investors find wider welcome mat

By Feng Jianmin | June 29, 2012, Friday | Print Edition

CHINA has recently stepped up efforts to make its capital market friendlier to foreigners, hoping to improve the maturity of the domestic stock market and expand use of the yuan.

Market analysts welcome any moves to ease controls, though they point to possible monkey wrenches in the government?s strategy: persistent weakness in Chinese stock, the relatively small sums of capital involved in the latest reform steps and the still heavy administrative controls over markets.

The China Securities Regulatory Commission, in a document released last week soliciting public feedback, proposes to lower requirements for foreign investors seeking to obtain licenses as òqualified foreign institutional investor.ó The so-called QFII program is the only channel available for foreign funds to access domestic bond and stock markets using US dollars.

The commission said it will cut the minimum requirement on assets under management by license applicants to US$500 million from US$5 billion and will also allow license-holders to invest in the country?s interbank bond market. Meanwhile, QFIIs will be allowed to hold up to a 30 percent stake in a listed firm, up from the 20 percent cap now.

òCompared with surrounding countries, where foreign capital is holding around 30 percent of shares in their capital markets, China still has huge room to introduce foreign capital to the stock market,ó the document said.

In April, China more than doubled the aggregate QFII quota from US$30 billion to US$80 billion. A separate but related program, the Renminbi Qualified Foreign Institutional Investors, or RQFII, had its quota more than tripled from 20 billion yuan (US$3.16 billion) to 70 billion yuan, even though only half of the previous quota was taken up.

òIt would seem these developments are positives not just for the market but for the offshore institutions looking to gain access,ó said Evan Goldstein, a researcher with the Standard Chartered Bank. òInstitutional investors with a mid- or long-term outlook will still flock to the market to apply for the quota.ó

Opening up more yuan-denominated assets to foreigners has long been considered a necessity if China wants to expand use of the yuan and ultimately turn it into a world-class reserve currency. For institutional players, China offers a haven to diversify their investments amid the debt woes of Europe and the economic sluggishness of the US.

Soon after higher quotas were announced, Qatar?s sovereign wealth fund began applying for a license and a US$5 billion quota to invest in China under the QFII program, the China Securities Journal reported, citing Qatar Energy and Industry Minister Mohammed Bin Saleh al-Sada. Singapore?s state-owned investment company Temasek Holdings Pte also has applied to increase its quota under QFII.

òHistorically, there has been no shortage of demand,ó Goldstein said. òAt various times in the last few years, we have seen queues of 70-80 investors waiting to get approval for QFII, with the wait for some applicants longer than a year.ó

However, the long-term, upbeat sentiment is tempered by concerns and risks obvious to most investors currently, he added.

One of the concerns are the low profits and possible losses from investment in stocks.

The A-share market has been among the worst performing of global equity markets in the past two years. The benchmark Shanghai Composite Index has slumped almost a third since the end of 2009.

The rapid expansion of the stock market, which many blame for the weak performance, has showed no signs of slowing.

As of June 24, 704 applications for initial public offerings were waiting to be reviewed by securities regulators, and 119 approved IPOs were pending listing.

Ten new IPOs for state-owned enterprises are expected, which could soak up about 100 billion yuan in market liquidity.

òMoreover, expectations that the yuan will appreciate are diminishing, further muting demand,ó Goldstein said. òDespite the increased quotas, increased flexibility and shortened approval times, documentation requirements have not changed.ó

Even if quotas aren?t fully subscribed, the application process can grind to a halt. From May to November last year, the State Administration of Foreign Exchange didn?t approve any new QFII applications due to a large influx of foreign capital via other channels, betting on an appreciation of the local currency.

CSRC Chairman Guo Shuqing, who took over last year, wants to restore confidence in the stock market by encouraging entries of more institutional investors. But since the CSRC announced its plans to lower the threshold for QFII entry, the Shanghai Composite Index has slid for four consecutive trading days, losing a combined 3 percent.

Gui Haoming, a chief analyst at Shenyin & Wanguo Securities, said that lifting investment quotas is more a signal of more work to be done on regulatory controls than it is a short-term fix for stocks.

òThe impact of QFII on the domestic market is declining every year,ó Gui said. òThe initial US$30 billion quota has not been filled yet,ó Gui said. òThe regulator?s increased support for QFII is preparation for the future, intending to create a sound regulatory environment and bring in long-tern investors.ó

QFII, he said, could replenish capital in the stock market and promote closer communication between domestic and foreign investors. òBut it would be too exaggerated to view QFII as the savior of China?s stock market.ó

Lujiazui finance fair


 

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