New regulations include a shorter capital lock-up period, sources say Mainland regulators will move to relax and clarify rules over the coming months to attract more foreign portfolio investors to the country's languishing stock markets, sources say. Dismal market sentiment among domestic investors, combined with record foreign currency reserves that mitigate the risk of capital flight, have prompted mainland regulators to make it easier for qualified foreign institutional investors (QFIIs) to invest. Changes in the pipeline include a shortened capital lock-up period and the removal of restrictions on QFIIs to open sub-accounts for clients without a QFII licence. QFIIs may be able to use several mainland brokerages to trade securities, and a much-needed clarification on tax liabilities for QFIIs may also be on the way. Details of the changes are expected to be announced in the first quarter, well before the two-year anniversary of the first yuan-securities trading by QFIIs in July. 'The [China Securities Regulatory Commission] has high expectations for QFIIs, hoping they will help lift the stock market out of the doldrums,' a source familiar with Beijing's QFII policy said. Since July 2002, investment quotas totalling US$3.4 billion have been granted to 24 foreign institutions to trade A shares and other yuan securities under the QFII scheme. Since then, China's foreign currency reserves have ballooned - to an estimated US$540 billion at the end of last month from about US$250 billion in mid-2002 - easing official concerns that liberalised restrictions on foreign capital movements could make the country vulnerable to currency flight. UBS, the first QFII to begin trading, has raised its investment quota to the maximum US$800 million, as initial concerns about the scheme's heavy restrictions as well as corporate governance and financial transparency at mainland-listed companies have given way to expectations of an appreciation of the yuan. Under existing rules, most QFIIs can begin repatriating the investment principal they have put into the scheme after one year. The lock-up period lasts for three years for closed-end China funds. 'Authorities have in principle agreed to shortening the lock-up period,' the source said. 'The CSRC supports it and the State Administration of Foreign Exchange does not appear to have serious objections.' Regulators might scrap a requirement that QFIIs repatriate investment principal only once every quarter after a one-year lock-in period, and that no more than 20 per cent of the investment principal can be repatriated at one time, the source said. The biggest unresolved issue affecting QFIIs might be taxes, where policy uncertainty was frustrating investors and making it difficult to comply with requirements for annual reports, the source said. Detailed taxation guidelines are now being worked out by various government departments and might be issued within the next couple of months. Regulators are expected to grant QFIIs the same tax treatment domestic fund managers receive. Stamp duties will be imposed on QFIIs and, like domestic investors, they will not be exempt from capital gains taxes. 'We have been appealing to the CSRC and tax authorities to simplify the tax scheme,' the source said. 'QFIIs prefer a slightly higher tax rate to a complicated tax scheme with many different types of taxes,' the source added. Although authorities are unlikely to lower the minimum US$50 million investment rule, they might soon allow QFIIs to open sub-accounts for their clients at the securities depository, the source said. This will help QFIIs better identify and segregate assets of clients who are too small to qualify for a QFII licence. After a year that saw several scandal-hit brokerages brought under government control, regulators are now ready to relax requirements that restrict QFIIs to trading through a single mainland brokerage, letting them cut risk by trading through multiple brokerages. The CSRC hopes that the strong presence of QFIIs will boost investor confidence. 'The CSRC is keen to review QFII policy,' the source said, adding that meetings with QFIIs and financial intermediaries were held as early as August or September.