China to expand foreign investment choices under RQFII

SHANGHAI (REUTERS) - China will loosen restrictions on foreign investment of offshore yuan back into onshore capital markets by permitting investors to buy individual stocks and bonds, rather than restricting them to index funds, regulators said late on Wednesday.

Changes to the Renminbi Qualified Foreign Institutional Investor (RQFII) will offer foreign institutions a broader range of investment options, according to rules posted on the website of the China Securities Regulatory Commission (CSRC).

The changes may increase foreign investment in small-cap stocks and spark the launch of a wider variety of investment products and attract a broader base of foreign investors.

The new rules also expand the types of institutions allowed to participate in the RQFII program to include Hong Kong subsidiaries of mainland commercial banks and mainland insurance companies. Financial institutions primarily based in Hong Kong also gained new access.

Previously, the program was limited to Hong Kong subsidiaries of mainland-based brokerages and fund companies.

These companies sold a limited range of bond funds and equity-based exchange-traded funds (ETFs), mostly to individual investors in Hong Kong.

The changes will allow RQFII-accredited institutions to offer a wider range of onshore products, including individual stocks, mutual funds, interbank bonds, index futures, warrants, and any other products approved by CSRC.

The looser rules could enable foreigners to increase investment in smaller companies listed in Shanghai and Shenzhen, rather than the large-cap shares that make up the bulk of equity ETFs currently on sale from RQFII participants.

The freedom to buy individual shares includes subscriptions to new share and convertible bond issues.

China introduced the RQFII scheme with an initial quota of 20 billion yuan (S$4 billion) in late 2011, with each firm allowed to put no more than 20 percent in the onshore stock market and the remainder invested in fixed income.

The quota was raised by 50 billion yuan last April, with the entire increase to be invested in the stock market through ETFs.

State media reported last month that CSRC will relax the 80 per cent fixed-income requirement, though that change was not specified in the latest rules.

Mr Guo Shuqing, the head of the China Securities Regulatory Commission (CSRC), said in late 2012 that the RQFII quota would be raised by a further 200 billion yuan, although he gave no specifics on how the quota would be allocated or what products could be purchased.

The new rules do not apply to the Qualified Foreign Institutional Investor (QFII) program, the programme that allows foreigners to convert foreign currency into yuan for investment in China's capital markets.