By Cheng Zhiyun
Published: 2008-04-30

News Page 4, issue no. 365 April 28 2008
Translated by Liu Peng
Original article:

Market regulators are taking a second look at how foreign institutions earn the right to invest in China's biggest stock market. The A-share market has long been off limits to foreign investors save those who have been granted the prized QFII (Qualified Foreign Institutional Investor) status by the Chinese government.

Aside from tightening the application process, China's State Administration of Foreign Exchange (SAFE) is drafting an assessment system to regulate and guide the expansion of QFII investments as a whole.

Presently there are 54 institutional investors that have been granted QFII status. At the end of last year, the State Council approved raising the cap on total QFII-based investment funds to 30 billion dollar from 20 billion dollar.

But one source from SAFE said that institutional investors' had already applied for the right to invest an amount that surpasses this figure. "We are not able to meet the demands of all foreign institutional investors seeking to enter the Chinese securities market, and thus can only distribute investment quotas and assess the applications in accordance with market-driven mechanisms," the source said.

For the year leading up to this past March, Chinese officials did not issue QFII status to any new foreign institutions. The trend ended when the China Securities Regulatory Commission granted QFII status to Columbia University in March. Afterwards, another two foreign institutional investors came into the fold as well, including Korea Prudential Asset Management Company.

The source said that this indicated that QFII would quicken its pace of development, and that SAFE would endeavor to diversify the QFII investments both in terms of industries and geographic region.

At present, most of the 54 QFII institutions are from developed European countries and the United States. Although institutional investors from the emerging markets have increased greatly, their investments are still relatively small.

The source said that the regulatory authority would adjust the QFII rules to give priority to mutual and pension funds.

The source added that the new rules would properly extend the deadline for foreign institutional investors to remit their QFII's investment funds and shorten the fund lock-up period. Originally, SAFE rules prescribed that within 3 months that an institution gained QFII status, they must deposit their applied funds into their account in China. In practice however, it has been difficult for open-ended funds to raise capitals in such a short period of time. Meanwhile, the investment long lock-up period was not ideal for some institutions.

Corresponding to the market expansion of QFII, regulators also considered adjustments in how QFII investments were supervised. The source said that on the one hand, SAFE would require QFII institutional investors to open a foreign currency account and where they could not convert their funds into yuan until they were about to invest. On the other hand, SAFE also would set up a yuan holdings limit. If the institution's yuan-calculated income exceeded the limit, they must exchange the surplus into foreign currency.

In the past, regulators allowed all the QFII funds to be exchanged into yuan the moment they were deposited in Chinese banks. But regulators then found that many QFII funds subsequently didn't invest in the market—they just let their funds sat in yuan.

One source from international business department of a commercial bank said, "In the context of the yuan's faster appreciation, [China's] policymakers don't encourage, actually, should even restrict, QFII's investors from keeping large stockpiles of yuan. The regulatory authority introduced the QFII only in order to promote the development of Chinese stock market, and so doesn't want to see these QFII institutions solely exchanging their foreign currency into yuan and depositing in the bank to earn gains from bank interest margins and exchange rate spreads."

The sources revealed that SAFE would establish a comprehensive assessment system for QFII. The system would assess the foreign institutions' investment operations in areas such as position proportions, turnover rates, and personnel and technology transfer to Chinese institutions.

It was reported that after gaining QFII qualification, the institutions would receive a low investment volume. But if they were graded highly by the new assessment system, SAFE might allow them to invest more in the Chinese stock market.