China has eased capital outflow limits on foreign institutional investors licensed under two official schemes in a move to bolster overseas interest in the Chinese market.
Two years ago, The People’s Bank of China (PBOC), the country’s central bank, stipulated that participants in the Qualified Foreign Institutional Investor (QFII) programme could not repatriate more than 20% of their capital invested in China. The measure was imposed to prevent capital outflows caused by stock market volatility.
In addition, participants under QFII and the separate RMB Qualified Foreign Institutional Investor (RQFII) scheme were not allowed to repatriate their principal sum invested in China for at least three months.
PBOC and the State Administration of Foreign Exchange (SAFE), a government body that manages China’s foreign reserves, announced in a joint statement that the restrictions have been loosened.
The 20% limit on QFII withdrawal has been eliminated to “streamline QFII management and operation”, as well as stimulate foreign investors’ appetite for the China market, according to the June 12 statement.
The lock-up period on the principal invested under both schemes has also been scrapped, and the investors are now “allowed to participate in onshore currency hedging to protect their investment against currency risk”, it says. Hedging was barred previously.
QFII, which was launched in 2002, allows qualified foreign institutional investors to access China’s onshore market. The RQFII programme, which was launched in 2011, allows Chinese currency funds raised overseas to be invested in the Mainland market.
According to Xav Feng, head of Asia Pacific Research at fund advisory firm Thomson Reuters Lipper, the move to ease the controls complements the recent inclusion of 234 large-cap Chinese stocks, or A-shares, into index provider MSCI Inc.’s benchmark indexes.
“Although the inclusion became effective in June, it will take at least a year for the Mainland market to see an obvious growth in foreign ownership. The easing [of RQFII and QFII controls] is an important step for the Chinese government to open up its domestic market,” Mr. Feng tells Asia Asset Management (AAM). “It will definitely help to stimulate international flow.”
Michael Wu, country executive for Greater China at Northern Trust, tells AAM that the lock-up period and limit on capital repatriation have been among major operational challenges faced by investors in the two programmes.
“The removal of such restrictions is a continuation of the opening up of China’s financial market and helps simplify the management of QFII/RQFII schemes,” he says.
As of May 2018, China had granted quotas totalling US$99.4 billion to 287 foreign investors under the QFII scheme, and 615.8 billion RMB ($96.12 billion) to 196 overseas investors under the RQFII scheme, according to figures from SAFE.
