Easing of curbs on overseas investors will help facilitate more capital flows
Foreign investors are expected to increase their fund allocation in China's A-share market as the new rules for the Qualified Foreign Institutional Investor and the RMB Qualified Foreign Institutional Investor programs will liberalize capital flows and improve forex risk controls.
Foreign funds totaling $600 billion to $700 billion are estimated to be injected into the A share market within two to three years after China eases restrictions on QFII and RQFII programs, said Thomas Fang, head of China equities at UBS AG.
"It really inspires us that China eases restrictions on foreign institutional investors because capital can flow at liberty," said Fang.
"We believe the foreign shareholding proportion in China's A-share market will be increased to 10 percent by three years from the current 2 percent to 3 percent."
Fang added that many overseas institutional investors showed more enthusiasm than domestic players in investing in the A-share market, and they are optimistic about China's fundamentals and the attractive price-earning ratios of A shares.
The People's Bank of China and the State Administration of Foreign Exchange on Tuesday unveiled new rules with immediate effect for the QFII and RQFII programs, which provide financial institutions with quotas for inbound investment.
Regulators will scrap a rule that limits the amount of funds that QFIIs can take out of the Chinese mainland every month at 20 percent of its mainland assets as of the end of the previous year. The requirements for a three-month capital lock-up period for QFII and RQFII redemptions will also be removed.
George Molina, head of emerging markets trading at Franklin Templeton Investments, said the new rules, coupled with the improvement in China's economic fundamentals and the MSCI's inclusion of A-shares will attract further demands from overseas investors.
Jing Ulrich, vice-chairwoman of Asia-Pacific at JPMorgan Chase & Co, said this is another step forward in liberalizing China's capital markets. These new rules are gradually but surely fulfilling China's declaration that its reforms will go beyond the expectations of the international community.
According to the new rules, QFIIs and RQFIIs will also be allowed to make forex hedges on their investments in the mainland to offset risks from forex movements.
"The new rule to allow QFIIs and RQFIIs to make forex hedges on their investments is a sign of further opening the foreign exchange market, which will attract more foreign investors and to help them prevent forex risks," said an official from the SAFE who declined to be named.
"We welcome the new rule as this signifies further opening and will result in a more friendly investment environment to foreign investors," said Jackson Lee, China head of Fidelity International. "With growing importance in the global capital market, foreign investors are increasingly looking into the opportunities in China." Lee said the flexibility provided under the new rule will allow more room for product innovation and development. Foreign investors will bring the benefits of their global experience when investing in the market.
By the end of May, 287 overseas institutions had received quotas amounting to a total of $99.46 billion under the QFII program, while the quotas in the RQFII program were 615.85 billion yuan ($96.2 billion) for 196 institutional investors from abroad, according to data from SAFE.