China Relaxes Stock Market Limits for Foreigners

Discussion in 'Trading' started by Billy Thunder, Sep 4, 2009.

    Published: Friday, 4 Sep 2009 | 6:05 AM ET Text Size
    By: Reuters
    China announced new draft rules on Friday on inbound portfolio investments, increasing the amount some institutions can invest in the country's stock markets, in a move likely to bolster market sentiment.

    The upward limit for individual institutions' quotas under the Qualified Foreign Institutional Investor (QFII) program will be raised to $1 billion from $800 million under the draft rules, the State Administration of Foreign Exchange (SAFE) said.

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    The agency also said it would reduce the lock-up period for insurance funds, pension funds and open-ended China funds to three months from the one-year requirement others must follow.

    Hong Kong's Hang Seng Index soared after the announcement on hopes of bigger capital inflows into China, ending up nearly 3 percent.

    The Shanghai stock exchange had closed up 0.6 percent before the news. The move comes after a sharp drop in Shanghai shares in August amid growing concerns about a drop in Chinese bank lending, but some analysts saw it more as part of the regulator's overall efforts to gradually open the capital account.

    Andrew Sullivan, a sales trader with MainFirst Securities in Hong Kong, said increasing the quota won't have a huge impact on the stock market.

    Only large QFII investors such as UBS have a full $800 million quota, while the majority currently have quotas of less than $200 million, Sullivan noted. "There is quite a bit of additional quota available," he said.

    The agency also lowered the minimum required quota to $20 million from the original $50 million, opening the scheme up to smaller institutions.

    Shanghai Skyline

    The overall investment quota of $30 billion will remain intact, as about $15 billion of that amount has been used so far, Chu Yumei, an official with SAFE, told a news conference.

    It was only in 2007 that SAFE raised the overall limit from $10 billion to $30 billion. The program was formally launched in 2002.

    Inbound, Outbound Both Up

    The announcement on inbound investments followed a statement earlier this week by SAFE promising to give domestic investors more channels for outbound investment under the Qualified Domestic Institutional Investor (QDII) scheme.

    The agency will be seeking market feedback on the rules until mid-September, but such rules are typically very close to their final state before being published in draft form.

    "The new contents of the regulations are mainly about attracting medium- and long-term capital, facilitating investment operations and risk control, and enhancing management and statistical monitoring of capital transactions," SAFE said in a statement accompanying the draft rules.

    The agency said it would also try to ensure that the institution that applies for a particular quota is the one that uses it and will crack down on illegal transfers or trading in quotas.

    Responsibility for approving QFII return remittances has been passed to local SAFE offices from the central office, it said.

    It will also allow QFIIs to set up separate accounts for their own proprietary investments and for open-ended China funds; previously they were combined in one.

    "This new measure could only increase the potential supply of funds in the stock market, but nobody knows how much of the expanded quotas would be used," said Qiu Yanying, an analyst at TX Investment Consulting in Shanghai. "Of course this move reflects the government hope to boost market sentiment — from this sense, it can be interpreted as a bullish factor for the market."