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Yuan

China doubles quota for foreign investors, paving way for global funds to get bigger bite of A-shares amid stock market slump

  • The government to double the combined quota under the qualified foreign institutional investors (QFII) programme to US$300 billion
  • Beijing is still selective in opening up, as it prefers capital inflow channels over outflow ones
PUBLISHED : Monday, 14 January, 2019, 12:33pm
UPDATED : Monday, 14 January, 2019, 11:01pm

China will double the quota for overseas investors in the country’s equities, opening the way for global funds to get a bigger bite of A-shares traded in Asia’s second-largest stock market as the government extends an olive branch amid talks to end a trade war with the United States.

The combined quota under the qualified foreign institutional investors (QFII) scheme, through which overseas funds can buy China’s A-shares, will be doubled to US$300 billion effective immediately, according to a statement by the State Administration of Foreign Exchange (SAFE).

“This can be seen as China making a genuine gesture to further liberalising its capital market to facilitate the trade war negotiations with the US,” said Commerzbank’s senior economist Zhao Hao.

“It reflects China’s desire to reduce tensions with the US towards resolving the trade issues, as the lack of market access has been one of the sticking points,” said Aidan Yao, senior emerging Asia economist at AXA Investment Managers.

China has been introducing more financial opening up measures since last year, as a dispute with the United States has heated up. The world’s largest economy is demanding fairer trade policies, greater market access and intellectual property protection, and a more level playing field for foreign companies.

Beijing has promised that within three years it will fully scrap restrictions on foreign ownership in the financial service industry, including in banking and insurance.

China’s securities regulator approved UBS Group as the first foreign bank to hold a majority stake in its securities joint venture in December. US banks including Citigroup, and JP Morgan are applying to set up majority-controlled joint ventures.

German insurer Allianz, on the other hand, became the first to win a go-ahead from Beijing to set up the first wholly owned holding company, in November.

Despite Monday’s fresh move in expanding the investment quota, China is still selective in terms of opening up, analysts said.

About US$100.3 billion of the QFII quota was in use by overseas institutions by the end of October, still more than 30 per cent from being fully used, according to SAFE’s data.

To compare, another cross-border investment programme, called QDII, or Qualified Domestic Institutional Investor, under which institutions can trade offshore stocks and bonds, is much more tightly controlled.

SAFE suspended approval of new quotas under QDII for three years until April 2018, when it will unfreeze the channel. Official data shows by the end of October, US$103.2 billion has been approved under the QDII programme.

“Under this circumstance, capital inflow is much more acceptable than outflow,” Zhou said.

China’s currency weakened by about 5.5 per cent against the US dollar in 2018, as China’s macro economic data deteriorated. It has strengthened against the US dollar in the last month, trading recently at 6.7677 per dollar in the offshore markets.

Monday’s move also marks the first QFII expansion since July 2013, when the ceiling was raised to US$150 billion from US$80 billion.

The QFII program was created in 2002 as the major channel for foreign investors to access China’s stock and bond markets.

It has been superseded since 2014 by a stock and bond “connect” programme with Hong Kong Exchanges & Clearing Ltd., which allows offshore investors to trade Chinese stocks and bonds directly from the former British colony.

Through all programmes, foreign investors held about 6.7 per cent of the total market cap of China’s stock market by the end of September, according to the latest data from China’s central bank.

That was up from 5.16 per cent at the beginning of 2018.

To compare, foreign capital made up 24 per cent of US market capitalisation, and 30 per cent of Japan’s value at the end of 2017.

The benchmark Shanghai Composite Index was the worst-performing major market in the world in 2018. It has had a more confident start to the new year, rising 1.8 per cent year to date.

MSCI, the world’s most tracked stock index, is polling investors about increasing the weight of China A shares in the MSCI global indices from 5 per cent to 20 per cent by the end of 2019, a move that would potentially bring US$800 billion into the domestic market.

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