Beijing to ease QFII regulations to boost foreign A-share trades

Beijing is set to ease rules on investment by overseas institutions, including relaxing rules on the lock-up period, a top foreign exchange regulator said.

Li Dongrong, a deputy director of the State Administration of Foreign Exchange (SAFE), told a financial forum in Shanghai yesterday that his agency was amending rules governing qualified foreign institutional investors (QFIIs) to aid overseas buying of A shares.

The news came amid speculation QFIIs were eager to buy A shares in the belief the market has hit bottom. So far this year, the Shanghai Composite Index has been the second-worst performer worldwide, at 31.34 per cent off last year's close, after Vietnam, which sank 40.83 per cent.

Sources said regulators were also set to increase the quota allowed for select foreign investors so that they could make longer-term investments.

QFIIs would be granted 'rotating quotas' based on the size of their open-ended funds, Mr Li said, without elaborating.

Analysts said the term 'rotating quotas' could be translated into an increase of the quota if buying interest turned strong.

In an apparent move to attract more overseas investors, SAFE will also waive rules on the lock-up period, allowing QFIIs to remit capital from the country more freely.

QFII funds cannot be transferred abroad for three years, according to rules published in 2002.

'As the regulations governing the QFII scheme are refined further and more quotas are allocated, foreign investors stand to serve a more constructive and positive role in the development of China's capital markets,' said Jing Ulrich, JP Morgan chairman of China equities.

In December last year, Beijing announced it would triple the QFII investment quota to US$30 billion but has yet to implement the policy.

'More liberal policies on foreign exchange regulation are expected this year,' said a source close to the People's Bank of China. 'It won't be a surprise if the quota turns out to be US$50 billion.'

The mainland introduced the QFII scheme in May 2003, hoping to import western-style equity investment practices to the fledgling A-share market. Early last year, the initial quota of US$4 billion was raised to US$10 billion amid increasing demand from foreign institutions.

Although the fund size was small, the mainland equity investment community said QFIIs were playing an important role in setting the tone for the market.

Several QFIIs reportedly were buying heavily into A shares on Monday, the day the Shanghai Composite Index jumped 4.45 per cent.

As of yesterday, the benchmark has tumbled 40.7 per cent from its peak in October last year.