Guo Shuqing, Chairman of the China Securities Regulatory Commission (CSRC), suggested at the Asian Financial Forum held in Hong Kong on January 14-15 that the CSRC was mulling over expanding its renminbi qualified foreign institutional investor (RQFII) program into an RQFII2 to encourage individual investors to participate, in an effort to encourage more investments in the A-share market. The government is also considering an expansion of the qualified domestic institutional investor (QDII) into QDII2, which will allow individual investment in foreign securities markets.

Given that QFII, RQFII and QDII are interwoven, the expansion of these schemes are of great significance to the opening up and improvement of China's capital markets and conducive to propelling the internationalization of the renminbi.

According to Guo, qualified foreign institutional investor (QFII) and RQFII programs now make up 1.5 and 6 percent of the A-share market respectively, and it was expected that the figures would be boosted nine-fold or 10-fold in the future. Spurred by the news, both indices at the Shanghai and Shenzhen stock exchanges saw an increase of over 3 percent on January 14.

In order to preserve the attractiveness of the A-share market for foreign investments, the renminbi exchange rate should maintain stable growth to keep risks within control and QFIIs should be kept on the mainland to prevent domestic capital markets from drastic fluctuations.

Since Guo assumed office, the CSRC has unveiled an array of policies encompassing dividend distribution, a new stock issue mechanism, a de-listing mechanism and over-the-counter market and transaction expenses. With the expansion of the QFII, RQFII and QDII schemes, reforms on the capital markets are under way.

On June 20, 2012, the CSRC called on the public to provide feedback on lowering the threshold for QFIIs, expanding the scope of investments and relaxing shareholder restrictions. Worth mentioning are the lower barriers for the QFII program—operating time was cut to two years from five years and the securities portfolio was reduced to $500 million from $5 billion, signaling that China's capital and financial accounts will open up step by step.

The further opening of Shanghai and Shenzhen stock markets to the outside world has great appeal to foreign investments. By maintaining an economic growth rate of around 8 percent, numerous investors still think highly of China as a nation with huge investment potential.

With an accelerated approval process and relaxed limitations on investment quotas, growing investment enthusiasm has sped up fund inflows from RQFII and QFII programs.

According to statistics from the CSRC, in August, September and October, QFIIs' monthly net purchases on the Shanghai Stock Exchange were as much as three times, nine times and 10 times the total in the first seven months, respectively.

By the end of December 2012, 169 QFIIs had investment quotas totaling $37.44 billion, according to the State Administration of Foreign Exchange. It also approved an investment quota of 67 billion yuan ($10.78 billion) to RQFIIs, including 57 billion yuan ($9.17 billion) for fund management companies and 10 billion yuan ($1.61 billion) for securities companies.

In December 2012, E Fund Management Co. Ltd.'s wholly owned subsidiary based in Hong Kong was approved as the 202nd QFII. Previously, only a few Chinese companies' overseas subsidiaries had acquired the qualification.

At a recent work conference, the People's Bank of China, the central bank, also laid stress on cross-border personal renminbi businesses, promoting the RQFII pilot projects and making preparations for QDII2 pilot projects.

The central bank's decision to expand cross-border renminbi business from enterprises to individuals indicated that the steps to open up China's capital and financial markets would be quickened.

This is an edited excerpt of an article by Zhou Zixun, a financial commentator, published in Shanghai Securities News.