x Abu Dhabi, UAEMonday 22 January 2018

China drops its $1bn limit over foreign investments

China yesterday moved to try to breathe new life into its beleaguered stock markets, which have tumbled by more almost two thirds in five years.

China yesterday moved to try to breathe new life into its beleaguered stock markets, which have tumbled by almost two thirds in five years.

The country's foreign exchange regulator has removed the US$1 billion (Dh3.67bn) limit for foreign sovereign wealth funds, central banks and monetary authorities buying Chinese assets through the qualified foreign institutional investor programme (QFII).

In addition, China may relax or abolish a rule that requires renminbi qualified foreign institutional (RQFII) investor funds to invest mostly in bonds, Norman Chan, the head of the Hong Kong monetary authority, said yesterday.

"Our delegates would like to see some flexibility in this split so that investors will have more choices," Mr Chan, the chief executive of the de facto central bank, said yesterday after meeting Guo Shuqing, the chairman of the China securities regulatory commission.

"We'd like to abolish or relax this proportion requirement. Chairman Guo has expressed that he agrees and supports our suggestions."

The new QFII regulations, published on the website of the state administration of foreign exchange (Safe), said the funds can now apply to invest more than $1bn but did not indicate a top limit. The policy is aimed at sovereign wealth funds such as Qatar Holdings and the Hong Kong monetary authority, both of which have already been approved to invest up to $1bn each through QFII.

Safe will retain the right to approve or deny individual applications on a case-by-base basis.

Chinese regulators have said in the past that facilitating increased foreign investment in Chinese assets would help restore confidence in China's stock markets, which have declined by more than 60 per cent since November 2007.

The overall net quota for the QFII programme remains at its current $80bn, of which Safe has only allocated $36bn for use by QFII funds as of November 30.

Foreign appetite for Chinese equities has shown some signs of increase in recent months, especially in Hong Kong, but the weak performance of stock-focused QFII funds - and complaints about high fee structures - have dampened appetite.

To drum up additional interest, Chinese regulators, including officials from the Shanghai and Shenzhen stock exchanges, went on an overseas tour in September to advocate for Chinese equities and QFII in particular.

The new regulations also relax restrictions on the ability of funds to remit principal and income from investments but made no further clarifications as to how China will tax QFII profits, an area of enduring uncertainty for QFII investors.

Chinese stock markets on Friday had their biggest single-day jump since 2009, which some analysts attributed to expectations of further relaxation of rules on foreign investment in stocks.

Others, however, offered alternative explanations for the unusual rise, such as behind-the-scenes share buybacks by state-owned entities trying to engineer a rebound for the end of the year.

Meanwhile, it was reported yesterday China may ease or abandon a rule that requires renminbi qualified foreign institutional investor (RQFII) funds to invest mostly in bonds.

RQFII funds now must invest at least 80 per cent of their assets in China's onshore bond market, with the rest going into equities or kept as cash.

Mr Guo has cut trading fees, pushed companies to increase dividends and allowed trust companies to buy equities since becoming the chairman a year ago, in another effort to shore up China's stock market, which is headed for a third year of declines.

The Shanghai composite index has lost 6.3 per cent this year, while the MSCI China index of mostly Hong Kong-traded shares, open to overseas investors, has gained 17 per cent as US bond purchases spurred foreign funds to pour money into emerging markets.

China may also expand the programme for investment of yuan raised offshore to include financial institutions based in Hong Kong, Mr Chan said. The RQFII mechanism allows Hong Kong units of Chinese financial companies to raise yuan offshore for investment in Chinese capital markets. Mr Guo supports opening the programme to all types of Hong Kong-based financial institutions, Mr Chan said.

* compiled from Reuters and Bloomberg News