China Expands QFII Schemes to Allow Greater Foreign Investment

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Apr. 5 – On Tuesday, the China Security Regulatory Commission (CSRC) announced the expansion of the country’s Qualified Foreign Institutional Investor (QFII) scheme, lifting the quota that qualified international fund managers are allowed to invest in China’s offshore capital market from US$30 billion to a total of US$80 billion.

Meanwhile, the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme was also expanded. The total amount of RMB that foreign investors can raise in Hong Kong for investment has been increased to RMB70 billion from the previous limit of RMB20 billion.

Echoing Premier Wen’s remarks on Tuesday endorsing bold financial reforms to “smash the monopoly” of the country’s big state-owned banks, these moves are viewed as important reform efforts. While the expansion of the QFII and RQFII schemes will undoubtedly open up new opportunities for foreign investors in China’s capital market, they signal the government’s intention to loosen its strict capital controls, liberalize its capital accounts, and further internationalize its currency.

According to statements issued by the CSRC, China will further facilitate the investment and operation of the QFII program to attract more long-term overseas funds to the domestic capital market.

Qualified Foreign Institutional Investor Scheme
The QFII scheme was launched in 2002 to allow licensed foreign investors to buy and sell RMB-denominated “A” shares on the Shanghai and Shenzhen stock exchanges, which were previously closed off to foreign investors.

In 2006, the government issued “Regulations on Domestic Securities Investment by Qualified Foreign Institutional Investors,” clarifying the qualifications of a QFII. Later in 2007, the QFII scheme was expanded to US$30 billion from the initial US$10 billion.

Since 2007, China has been improving the QFII program and accelerating its approval process to allow more foreign capital inflows into the stock and bond market. Up until March 2012, a total of 158 institutions from 23 countries had been approved to invest a total of US$24.55 billion. About 75 percent of assets were invested in Chinese stocks, with the rest in bonds and deposits, according to the statement. Foreign investors own approximately 1.09 percent of the free float in China’s equity market.

RMB Qualified Foreign Institutional Investor (RQFII) Scheme
The RQFII pilot scheme was launched in December 2011 to allow qualified investors to invest RMB-based funds raised in Hong Kong in the mainland securities market within a permitted quota. The pilot scheme granted 21 institutions with an investment quota of approximately RMB20 billion.

Similar to the QFII scheme, the RQFII scheme aims at widening investment channels for overseas funds on the Chinese mainland. More specifically, the RQFII scheme is part of the government’s effort to facilitate the back flow of RMB and promote the internationalization of the currency.

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