Lifting of QFII Restrictions Expected to Drive Foreign Investment in Chinese A Shares

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Analysts expect the Chinese government’s recent move to lift restrictions on qualified foreign institutional investors (QFII) to spur investment in domestic A-shares.

The State Administration of Foreign Exchange recently rescinded the 20% ceiling on monthly repatriations by dollar denominated QFII’s, as well as the lock-up period on investment principals for both QFII’s and Renminbi Qualified Foreign Institutional Investors, as part of efforts to “further raise the ease of cross-border securities investment.”

QFII’s will be permitted to entrust their trustees with the handling of outbound capital remittance, while both QFII’s and RQFII’s will be permitted to remit their investment principal based on investment conditions and engage in forex hedging in China.

Wang Youxin (王有鑫), a forex analyst with the Bank of China International Financial Research Institute, said to state-owned media that foreign investors currently have three main channels for investing in the Chinese A-share market given that Beijing has yet to fully open it.

These include the stock connect mechanisms that link Shanghai and Shenzhen with Hong Kong; the use of QFII’s and RQFII’s, as well as domestic Hong Kong investment funds.

According to Wang the daily as well as total quotas on the stock connect initiatives have been completely loosened, and if the lock-in period and remittance ceilings for QFII and RQFII had been retained, this would have greatly reduced their appeal to foreign investors.

For this reason Wang believes constant improvements to the QFII and RQFII mechanisms is of benefit to the “reciprocal matching and coordinated development” of the various A-share market investment channels.

Wang further points out that the inclusion of over 200 A-shares in the MSCI Emerging Markets Index has whetted overseas interest in Chinese stocks, while the removal of restrictions on QFII and RQFII will help to dispel risk concerns amongst foreign investors.

Qu Qiang (曲强), a researcher from the International Monetary Research Institute of Renmin University, said that the Chinese central bank is making good on its commitment to further ease restrictions on foreign investment, and grant them greater independence and freedom of operation.

“The removal of restrictions will increase the confidence of foreign capital in the Chinese market,” said Qu.

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