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China scraps limits in two foreign investment schemes

By Asia Asset Management  
September 12, 2019

China has eliminated limits in two investment schemes for foreign institutional investors in a bid to attract international capital into the domestic stock and bond markets.

As a result, investors will only have to go through registration procedures in the almost 20-year old US-dollar denominated Qualified Foreign Institutional Investors (QFII) and the newer RMB Qualified Foreign Institutional Investors (RQFII) schemes instead of applying for quotas.

The move, which was effective September 10, was announced by the State Administration of Foreign Exchange (SAFE), supervisor of China’s foreign reserves.

The QFII scheme, which was launched in 2002, allows foreign institutional investors to invest in Chinese stocks and bonds. The RQFII scheme, introduced in 2011, allows foreign institutional investors to invest Chinese currency raised offshore in China’s stocks and bonds.

Abolishing the limits is a “major reform” in opening up China’s financial markets, SAFE says in a statement on September 10.

The regulator has granted US$300 billion of quotas under the QFII scheme, and 693.3 billion RMB (US$97.4 billion) under the RQFII programme.

It says removing the limits makes it “much more convenient for overseas investors to participate in China’s domestic financial markets, making China’s bond and stock markets more broadly accepted by international markets”.

The measure is mainly symbolic because the quotas are mostly unused, according to David Chao, global market strategist for Asia Pacific ex-Japan at US asset manager Invesco.

“While this move is largely symbolic since only a third of the $300 billion cap is currently used, it will make it easier for offshore investors to access the Chinese markets in a more meaningful way,” Mr. Chao writes in a commentary on September 11.

The elimination of investment limits, and the central bank’s recent cut in banks’ reserve requirement ratio, indicates Beijing is “strategically making a positive push towards adding liquidity to the financial markets and renewing flow of investment into China”, according to Paul Sandhu, head of multi-asset quant solutions at BNP Paribas Asset Management.

Increased liquidity from these measures may also reduce some of the market risks caused by the US-China trade war, Mr. Sandhu says in a report on September 11.

The People’s Bank of China on September 6 reduced banks’ reserve requirement ratio by 50 basis points to 13%.