China doubles foreign investment quota as it talks up market opening

Labourers working on a construction site are seen next to setting sun in Beijing
Labourers working on a construction site are seen next to setting sun in Beijing October 14, 2014. REUTERS/Kim Kyung-Hoon

January 14, 2019

By Andrew Galbraith

SHANGHAI (Reuters) – China will double the quota for the country’s foreign institutional investment program, as Beijing talks up financial reforms amid stock market weakness and slowing economic growth.

The State Administration of Foreign Exchange, the foreign exchange regulator, said on Monday it would increase the quota for the Qualified Foreign Institutional Investor (QFII) program to $300 billion from $150 billion to meet investment demand from abroad.

The QFII program, however, has struggled to use up even the existing $150 billion quota. In December, overseas investors received quotas – the amount each investor is allowed to invest under the scheme – worth $101.1 billion.

Jim McCafferty, head of equity research, Asia Ex-Japan at Nomura, said the QFII announcement was an “incremental” change.

“For some individual investors that are invested in the QFII program, it’s indicative of a more relaxed and more responsive government to getting those overseas investors in,” he said.

In contrast, index changes taking place this year, including higher weighting of Chinese A-shares in MSCI indexes, are “very, very crucial” for boosting foreign capital flows, McCafferty added.

Fang Xinghai, vice chairman of China’s securities regulator, said on the weekend that inflows into the Chinese stock market could double to 600 billion yuan ($88.8 billion) in 2019 due largely to greater inclusion of A-shares in global indexes.

Inflows into China’s bond market, the world’s third-largest, are also set to rise with the phased inclusion of Chinese yuan-denominated government and policy-bank bonds in the Bloomberg Barclays Global Aggregate Index starting in April.

The QFII program was first introduced in 2003 to allow foreigners to invest in China, but has since been partially superseded by the Stock and Bond Connect schemes linking Hong Kong and mainland markets. The QFII quota offers the potential to invest beyond traded securities.

The benchmark Shanghai Composite index <.SSEC> fell nearly 25 percent last year, making it among the world’s worst-performing major equity indexes, amid signs of slowing growth and an escalating trade war with the United States.

($1 = 6.7605 Chinese yuan)

(Additional reporting by the Beijing Monitoring Desk; Editing by Jacqueline Wong)

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