China will relax controls on qualified foreign institutional investors (QFIIs) soon, following a decision to nearly triple the amount they can spend.
Regulators plan to scrap the requirement that a QFII invest at least half of its funds in stocks, said two people briefed by government officials about the matter.
They said waiving the rule would allow the foreign institutions to earmark more funds for investments in futures and other derivatives.
QFIIs, subject to the approval of the authorities, can exchange a certain amount of foreign currency into yuan to invest in Chinese equities and bonds.
Currently, they must invest half of their funds in A shares while holding no more than 20 per cent in cash.
The requirement resulted from officials' worries that the funds, betting on an appreciation of the Chinese currency, would prefer to hold yuan deposits rather than buy yuan-denominated shares.
'The regulators are attempting to give the foreign funds more freedom in allocating their QFII assets. It is a sign that the government is now determined to allow them access to futures and other derivatives,' said analyst Cindy Qu at fund consultancy Z-Ben Advisors.
The QFII scheme, launched in 2003 in an attempt by Beijing to introduce long-term foreign investors to the volatile mainland stock market, received a shot in the arm early last month as Beijing announced an increase in the overall quota to US$80 billion from US$30 billion.
QFIIs are still barred from playing commodity or stock-index futures.
Authorities have been planning since 2010 to let QFIIs put as much as 10 per cent of their investment quotas into stock-index futures.
QFII funds, most of which are managed by big global institutions like UBS and Morgan Stanley, could provide a stabilising force to the fledging equity-derivative market.
Beijing will also simplify approval procedures and lower the threshold to attract more overseas funds to the A-share market, people familiar with the plans said.
Regulators will also allow different units under the same financial group to apply for QFII quotas separately. According to existing rules, a single QFII can apply for a quota of up to US$1 billion.
But the people said hedge funds would not be welcome in the QFII scheme, because regulators were eyeing only long-term investors.
It was reported last week that regulators were expected to lower the threshold for QFIIs, a move likely to give hedge funds access to A shares.
Wang Lin, a director of the China Securities Regulatory Commission's fund regulation department, was quoted by Xinhua as saying QFIIs were encouraged to make long-term investments on the mainland.
Beijing has granted QFII status to 167 foreign institutions, with a combined US$26 billion quota.
Among them, 37 QFIIs had applied to increase quotas to buy more A shares, the official Shanghai Securities News reported.