Wang Jian, a researcher at China Securities Co. Ltd., said since China's capital market is still largely closed to foreign investors, opportunities are severely constricted by the approval process and quota limits. According to Wang, foreign institutions with investment in China all have high hopes for the Chinese economy, therefore even though the Chinese stock market has remained weak in the last two years, many foreign institutions still hope to obtain opportunities for investment first, hoping to gain profits when the market improves.

At present, QFIIs are performing well on the secondary market, with mechanical equipment, food and beverages, as well as metals and non-metals as the favored industries for investment.

Ma Jun, Managing Director and chief China economist at Deutsche Bank AG, said on April 4 on his micro-blog that since China's trade surplus is decreasing fast, its overseas direct investment is growing and expectations on renminbi appreciation is weakening. All this drastically reduces the growth of China's foreign exchange reserves and offers a rare opportunity to open the country's capital accounts and capital market.

This may explain why foreign investors' enthusiasm in the A-share market is ever growing in spite of large market fluctuations.

Relaxed controls

To facilitate accessibility to China, the CSRC is researching ways to modify QFII management measures, hoping to reduce thresholds and expand the investment scope. The securities watchdog is also consulting with SAFE to relax capping restrictions that currently sit around $1 billion. However, Wang said the newly added $50 billion of quotas will not be allocated all at once. There will be a steady process and the allocation may be completed in the next three to five years.

The CSRC will relax restrictions on QFII approval in three main aspects. First, it will allow different institutions under the same group to apply for QFII status. For example, the CSRC recently approved QFII status of Fullerton Fund Management Co. Ltd., while two years ago, Temasek Fullerton Alpha Pte Ltd. under the same group obtained QFII status.

Second, it will allow QFIIs that have issued structured products (pre-packaged investment strategy based on derivatives) to increase investment quotas. Previously, to limit QFIIs from issuing structured products and encourage long-term overseas investment to directly invest in China's capital market, the CSRC stipulated that newly approved QFIIs and newly added quotas were not allowed to issue structured products, and to those QFIIs already issuing structured products, the CSRC would not approve new quotas.

Third, it will relax restrictions on QFII investment proportions. The CSRC used to require that the proportion of QFII investment in stocks should not be lower than 50 percent and that of cash should not be higher than 20 percent. Starting April 16, China has expanded the daily trading band of yuan, allowing it to fluctuate by 1 percent above or below the parity rate. Before, it could move by 0.5 percent in either direction. This has weakened expectations on renminbi appreciation, curbed massive flow of capitals in a short term and stabilized investment behaviors by QFIIs and other international capitals. To meet the demand of QFIIs to flexibly allocate investment, the CSRC no longer requires that the proportion of QFII investment in stocks be higher than 50 percent, but the former requirement that the proportion of cash should not exceed 20 percent remains.

Top 10 QFIIs With Quotas

Email us at: lanxinzhen@bjreview.com