| In a bid to increase capital flow into Chinese securities, the China Securities Regulatory Commission has significantly stepped up the amount of money that foreign institutions are entitled to invest in China’s capital market – according to “China Opens the door wider to foreign investors” Financial Times, April 5 2012.
Heightening liberalisation has seen China almost triple its standard quota from its usual limit of 30 billion yuan to 80 billion yuan. Not only will the regulatory commission expand its QFII (Qualified Foreign Institutional Investor Scheme) but it will also increase the total amount of RMB that foreign investors are permitted to raise in Hong Kong for investment back in the PRC from 20 billion yuan to 70 billion yuan – a significant increase under the Renminbi Qualified Foreign Institutional Investor Scheme (RQFII). The latest moves signal an attempt by China to relax its stringent capital controls and to reduce reliance on the US dollar for cross border transactions as well as promoting the use of its RMB currency. The motivations prompting the recent changes are manifold; the CSRC is attempting to drive up both the Shanghai and Shenzhen Stock Exchanges which have floundered since they peaked in October 2007. By encouraging investment from long term institutional investors not only will China diversify its equity market but the theory is that this will also sideline speculators who create volatility in the stock exchanges with their short term investments. In addition, an injection of capital from foreign investors will serve to bolster the dwindling Chinese market which did not perform as well as expected last year. With FDI in China falling for a fifth straight month in March, it appears that the sovereign debt crisis is still overshadowing prospects for growth in the economy and the possibility of gains in the yuan. Accordingly, these reforms attempt to curb the impact of some of these rather bleak contingencies. The reforms also attempt to pave the way for a fully convertible currency in the future – because although at present companies are able to convert RMB for use in trade and direct investment, they are not allowed to invest in capital markets outside the QFII and RQFII schemes (taken from “China to let in more foreign investment” Financial Times April 3 2012.) It remains to be seen how successful these reforms will be in reality however, given that analysts are skeptical about the level of transparency that these schemes will afford. That said, these changes do represent an important stepping stone towards China’s integration (more fully) into the global and political economies – and if successful can make a powerful impact on China’s market. |
