China doubles foreign investment limit, in further opening

Authorities have been stressing that they plan to further open China's financial system, building on earlier promises that they would better integrate the more than US$40 trillion sector into the global economy.
Authorities have been stressing that they plan to further open China's financial system, building on earlier promises that they would better integrate the more than US$40 trillion sector into the global economy.PHOTO: REUTERS

SHANGHAI (BLOOMBERG) - China doubled the limit of one of the main foreign investment channels into the world's second biggest economy, continuing to open up its financial system amid the country's trade war with the US.

The quota for the Qualified Foreign Institutional Investor program was increased to US$300 billion, the State Administration of Foreign Exchange said in a statement on Monday. It's the first expansion since July 2013, when the ceiling was raised to US$150 billion from US$80 billion. About US$101 billion of the quota is in use by overseas institutions, according to data compiled by Bloomberg.

Authorities have been stressing that they plan to further open China's financial system, building on earlier promises that they would better integrate the more than US$40 trillion sector into the global economy. Policy makers have been keen to show that the dispute with America won't derail the effort - on Friday, the banking regulator said it would study more financial-opening measures this year.

"China is sending a signal that it's honouring the promise to open its financial markets and it also wants to show some goodwill to the US amid trade talks," said Wang Yifeng, a Beijing-based researcher at China Minsheng Banking Corp.

An injection of foreign cash would help boost the country's struggling capital markets, which saw the Shanghai Composite Index register the biggest loss among major global benchmarks last year.

Started in 2002, the QFII programme was for years the main way for foreign investors to access China's stock and bond markets. Trading links with Hong Kong Exchanges & Clearing Ltd., which allow offshore money managers to trade Chinese stocks and bonds via the former British colony, have in recent years provided an alternative avenue.

The moves come ahead of Vice-Premier Liu He's trip to the US for a fresh round of talks, scheduled for late January. President Donald Trump has accused China of being a one-sided beneficiary of global commerce and steps to internationalise markets may help in easing trade tensions.

 

"This is more of a symbolic step by Chinese policy makers to show they are opening up the financial markets as planned amid the ongoing trade negotiations," said Qin Han, chief fixed-income analyst at Guotai Junan Securities, China's second largest securities firm.

It's easy to see the appeal of China to foreign managers looking for investments. The country's stock market is among the world's biggest, with total value of US$5.65 trillion, according to data compiled by Bloomberg. Its bond market is worth US$12.3 trillion, the data show.

Overseas involvement is also set to increase with the addition of the markets to global indexes. Gauges operated by compilers including MSCI Inc. and FTSE Russell, a unit of London Stock Exchange Group Plc, are among those adding Chinese stocks, while some of its bonds will be put on track for a phased-in inclusion to the Bloomberg Barclays Global Aggregate Index in April. Bloomberg LP, which operates the index, is the parent company of Bloomberg News.

Foreign institutions and individuals held US$189 billion of domestic Chinese stocks as of September, accounting for roughly 3 per cent of total market value, according to data compiled by Bloomberg.

Mr Wang said China doubled the quota even though the current limit hasn't been used up because MSCI may raise foreign investors' required allocation to Chinese stocks. Moves to open the national bond market in the past year also mean more room will be needed once the currency stabilises, he said.