Foreign investors are granted direct access to China’s capital markets through the so called QFII program, which covers A shares and bonds, and the Renminbi Qualified Foreign Institutional Investors program. The RQFII program enables overseas units of Chinese asset-management companies to invest in yuan-denominated bonds. Substantially the QFII scheme represents China efforts to allow, on a selective basis, global institutional investors to invest in its renminbi capital markets. Early this year (Jun. 22) president of the China Securities Regulatory Commission (CSRC) Guo Shuqing pointed out at the meeting the National Securities and Futures Regulatory Working Conference held in Beijing, that China’s capital market will develop on a more solid basis as it is looking forward to valuable strategic opportunities. Guo said that the CSRC will persist in completely balancing the investing and financing functions of the capital market and closely combining deregulation with supervision enhancement. The CSRC will strive to build a more mature and stronger capital market, so as to let finance directly serve the overall economy in a wider range and higher level (
http://www.morningwhistle.com/html/2013/FinanceMarkets_0123/216812.html
).
One of the goal of the CSRC is to enhancing the fundamental function of securities firms, through quicker development all types of professional securities-selling institutions, and further improving QDII system, continuing to enlarge the quota of QFII and RQFII. It seems that Chinese capital markets not only are growing of importance, but they are also becoming the new frontier for capital investments. So it is necessary to explain how to invest in the Chinese stock exchanges. In fact a foreign (Institutional) investor needs to become a QFII (i.e.
Qualified Foreign Institutional Investors
) before to allocate its resources in the Chinese capital markets.
Definition of Qualified Foreign Institutional Investors:
Qualified Foreign Institutional Investors as introduced above are the entities approved by the China Securities Regulatory Commission (i.e. CSRC
http://www.csrc.gov.cn/pub/csrc_en/
) to buy and sell RMB-denominated “A” shares in China’s mainland stock exchanges (Shanghai and Shenzhen).
The CSRC allocates licenses, while the State Administration of Foreign Exchange (i.e. SAFE) decides the size of each investment quota. The program become effective in December 2002 and marked the first time that foreign investors could trade domestic Chinese securities (though indirectly). More specifically a QFII can trade: RMB denominated “A” shares, Treasury, corporate, and convertible bonds, warrants, Securities mutual funds, Initial public offerings, other CSRC-approved financial products. However, limits also exist on the nature of these investments: for example in any single (listed) company, the total combined shares held by foreigner institutions cannot exceed 30% of the total outstanding shares of that company, and an individual QFII can hold no more than 10% of those total outstanding shares. Any foreign asset management company, security house, commercial bank, sovereign fund, insurance company, or pension fund that meets minimum CSRC requirements is eligible to become a QFII. Applicants must obtain license approval from the CSRC and investment quota from SAFE. Foreign Institutions must also meet both qualitative and quantitative requirements to be eligible for QFII
status
which will be granted, in case, by the CSRC. For example, these candidates must have sound financial and credit
status
and have received no sanction from regulatory agencies in the past three years. In an effort to encourage long-term investors, the CSRC has indicated preference for asset management Institution. Though all above mentioned Institutions are eligible, asset management institutions are often considered highly in the application process.
It is worth noting that six overseas institutions were allowed to become Qualified Foreign Institutional Investors in December 2012, bringing the total number of QFII in China to 207, according to a list released by the China Securities Regulatory Commission on January 15, 2013.
In 2012, the CSRC approved the applications of 72 foreign institutional investors to become QFII in China, and as many as eight QFII applications worth a total of $1.4 billion were approved in December 2012, and as many as 169 QFII were given a total investment quota of $37.44 billion by the end of 2012 (since QFII quotas were launched in 2003), according to data of the State Administration of Foreign Exchange. In 2012 alone, China awarded some $16 billion in quotas for QFII. As for the RQFII scheme, 24 institutions – including 12 fund companies and 12 securities firms – held a combined quota of 67 billion yuan at the end of last year, according to the SAFE (
http://www.safe.gov.cn/
).
According to Mr. Guo Shuqing, chairman of the CSRC, early this year i.e. on Monday 14, January 2013 at the Asia Financial Forum in Hong Kong, affirmed that “China can increase by 9 or 10 times the current level of investment quotas for Renminbi Qualified Foreign Institutional Investment, or RQFII, and QFII.”
The government is considering further expanding the schemes to allow all of the institutional investors who meet qualification requirements to take part in the programs, Guo explained. Since first launched in December 2011, China has already twice lifted the quota for the RQFII scheme, which allows yuan funds raised in Hong Kong to be invested in the mainland securities market, with the current ceiling on the program now set at 270 billion yuan ($43.42 billion). Meanwhile, the QFII quota was widened to $80 billion in April 2012, up from $30 billion. Mr. Guo had also said in November (2012) that the upper limit on the QFII scheme was reached.
Prospective of these new forms of financial investments in China
China is one of the world´s leading economic powers today, and confidence in the world’s second-largest economy is still mounting as we can witness from the ever increasing foreign direct investments (FDI), and especially a more interest towards Chinese capital markets. It is foreseeable and predicted China soon will become the new frontier for capital investments. In fact, recently China is bolstering the strength of its capital markets in a move to attract more foreign investments and encourage M&A activity, which serves also to the restructuring of listed companies. Chinese financial centers are among the most competitive financial centers worldwide and their importance it is expected to growth in the near future.
It is also worth stressing that Shanghai is making moves to enhance its mergers and acquisitions market with the aim to make itself a global financial hub by 2020 (an ambition which was approved by the state Council in March 2009). Just to confirm the importance China is giving to its financial markets it is worth reporting that the Shanghai Stock Exchange will implement “round-the-clock trading” by 2020. No Stock Exchange in the world has yet implemented 24-hour trading. Furthermore, the local government is considering setting up a
China Mergers and Acquisitions Association
in Shanghai. This represents another confirmation of the trend which at present China is experiencing.
Cristiano Rizzi