To Entice Foreign Capital, China Relaxes Regulations

(September 9, 2009) – In a move signaling an increased willingness to let foreign institutional investors play in domestic markets, China has relaxed quotas and lowered lockup times for foreign investors.

Draft regulations released last Friday include a provision that would raise the maximum individual contribution for QFIIs from $800 million to $1 billion, according to Reuters. Also included in the proposal would be a lowering of the minimum investment from $50 million to $20 million, and a relaxation of lockup periods from one year to three months. However, the overall limit of $30 billion placed on QFIIs still remains at $30 billion, a relatively small sum compared to the market capitalization of more than $3 trillion.

The QFII program, launched in 2002, allows designated foreign investors—including Yale University, Singapore sovereign wealth fund Temasek, the Bill and Melinda Gates Foundation, and numerous American banks—to purchase and sell shares in the Chinese public markets. As of February, a total of 79 foreign investors had been approved under the program.

The move comes after the Chinese stock market fell 22% in August; some pundits see this as a measure, at least symbolically, to both stabilize the domestic market and aid QFII investors.

“Most QFIIs are now brokers using funds they have raised to invest in China,” Wu Haijun of Power Pacific Corp of Canada—the QFII participant for Power Corporation of Canada—told Reuters. “Funding channels for those brokers are not always stable. Some may not be able to assume the role of stabilizer in case of market volatility. By lowering the minimum quota requirements and other steps, China apparently hopes to diversify QFII investors.”