The mainland securities regulator is considering letting foreign institutions raise yuan-denominated funds slated for A-share stocks, further liberalising the equity market to help Shanghai transform into an international financial centre.
Fang Xinghai, the director-general of Shanghai's financial services office, said yesterday that the time is right to expand the qualified foreign institutional investor (QFII) scheme since the risks are now 'controllable'.
'We think yuan-denominated QFII funds should be studied and put on the agenda,' he said. 'As long as the quota distributed is reasonable, there won't be any risks.'
Beijing introduced the QFII programme to the fledgling A-share market in 2003, under which selected overseas institutions were allowed to exchange a certain amount of foreign currencies to yuan for equity buying.
To date, US$30 billion of the scheme's quota has been granted to nearly 100 foreign institutions. This is expected to keep rising due to mounting interest in mainland-listed stocks.
Fang said the yuan-denominated QFII funds would be allowed to play on the interbank market in addition to equities and bonds.
A Goldman Sachs report said the nation's domestic bond market was 'quite small' compared with other global markets including the US and Japan with US$2.4 trillion notional of debt securities outstanding at the end of September last year, or about half of its gross domestic product.
Expanding the debt capital market would benefit the country by giving municipal governments access to alternative funding sources and reduce their dependency on bank loans, Goldman said.
Last year, the State Council endorsed Shanghai's ambition to become a global financial hub, promising to step up liberalisation of the markets to attract more overseas capital inflow.
However, the groundbreaking changes have to be endorsed by the securities and banking regulators as well as the central government.
Meanwhile, the city government is pressing ahead with plans to establish an international board on the Shanghai Stock Exchange where foreign companies can launch initial public offerings to be traded by mainland investors. HSBC Holdings is tipped to be among the first foreign firms to list in Shanghai.
An exchange official said earlier that regulators were accelerating preparations for the board in the second half of this year, but Fang said yesterday there was still no clear-cut timeframe on when it would be officially launched.
In the past two years, the country's leading homegrown asset management firms have been manoeuvring to attract foreign investors as they prepared to launch QFII products overseas. China Asset Management, China Southern Fund Management and Harvest Fund Management have already set up offshore units.
Analysts said regulators would probably allow the Chinese fund houses to raise yuan-denominated QFII funds abroad at the initial stage of the liberalisation process.
The director-general did not elaborate on whether foreign institutions would be allowed to raise yuan- denominated funds on the mainland.
Nearly 100 foreign institutions are in the QFII scheme
This is the amount, in US dollars, of QFII quota that has been granted so far: $30b