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China officially scraps foreign quotas in two investment schemes

By Asia Asset Management  
May 11, 2020

China has officially eliminated foreign quotas in two cross-border investment schemes in order to attract more international capital to the onshore capital market, delivering on a pledge made last September.

It’s Beijing’s latest move to open up China’s financial markets, and one that some believe could potentially pave the way for internationalisation of the Chinese currency.

The quotas in the nearly 20-year-old Qualified Foreign Institutional Investors (QFII) scheme and the newer RMB Qualified Foreign Institutional Investors (RQFII) scheme were dropped on May 7, effectively making them irrelevant.

This is “to better facilitate foreign investors’ participation in China’s financial market and support the central government’s initiative to further open up onshore financial sectors”, according to a joint statement by the People’s Bank of China, the country’s central bank, and the State Administration of Foreign Exchange, the supervisor of foreign reserves.

The QFII was introduced in 2002 to allow foreign institutional investors to invest in China’s capital markets. The RQFII, which permit them to invest renminbi raised offshore in the country’s onshore assets, was launched in 2011. Beijing had granted nearly US$215 billion of quotas under the two schemes as of last month.

Qualified foreign investors can now directly register with the foreign reserves supervisor through their custodian institutions for inbound investments instead of having to apply for quotas under the schemes.

Administrative requirements for remittance and repatriation of funds and currency exchange have also been standardised and simplified, the statement says.

The move underscores Beijing’s pledge to press ahead with financial liberalisation, says Chi Lo, senior Greater China economist at BNP Paribas Asset Management.

“The scrapping of these foreign investment quotas is also a small step towards capital account liberalisation and RMB internationalisation because it helps build a freer two-way trading mechanism of Chinese assets. This will increase the attractiveness of RMB assets for international investors,” Mr. Lo tells Asia Asset Management (AAM).

According to Paul Tang, chief economist at Hong Kong’s Bank of East Asia, the move may also speed up foreign investments in China because they can acquire assets at depressed prices as the coronavirus crisis batters the global economy and financial markets.

“China market is [currently] heavily underexposed by international investors,” Mr. Tang tells AAM.

As of April 2020, Beijing had granted $114 billion of QFII quotas to 295 foreign institutions, and 713 billion RMB ($100.7 billion) of RQFII quotas to 227 foreign investors, according to figures from the foreign reserves supervisor.