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Business
Print Edition> Business
UPDATED: April 5, 2007 NO.15 APR.12, 2007
QFII Quota Demands Outpaces Limits
As quotas run out for Qualified Foreign Institutional Investors, speculation about additional quotas runs rife
By LIU YUNYUN
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Watchdogs bark warnings

According to statistics from the National Conference on the Supervision of Securities and Futures, at the end of last year QFIIs ccounted for 97.1 billion yuan of the trading volume in the Renminbi (RMB)-denominated A share market, ranking them as the second largest institutional investor just after domestic mutual funds.

The QFII strong presence and subtle influence on the Chinese stock market has made the supervisory department vaguely uneasy. The watchdog wonders how much potential risk overseas capital will bring to the Chinese stock market.

"A more open market is the trend," said Xu Jianqiang, an analyst with CITIC Securities. "The government should regulate QFII investment conduct more effectively, but not to the point of restricting their quotas or dragging out the approval procedure."

Xu also said that pension, insurance and university funds are the most welcome by QFII supervisory department. "Those funds represent the entry of long-term investors and their recognition in the Chinese capital market."

QFII ABC's

What is QFII?

On November 5, 2002, the China Securities Regulatory Commission (CSRC) and the People's Bank of China (PBC) introduced the QFII (qualified foreign institutional investor) program as a provision for foreign capital to access China's capital markets.

Chinese QFII regulations relaxed some capital controls and allowed foreign institutions to invest in RMB-denominated equity and bond markets. In actuality, a QFII is a Chinese brokerage business, which allows qualified foreign institutions to trade Chinese A-shares via special accounts opened at designated custodian banks for their clients.

The QFII mechanism not only further opens China's securities markets, but also gives foreign investors an opportunity to take position on those markets and buy shares in Chinese companies, thus participating in China's phenomenal growth. QFIIs can therefore provide their clients with added opportunities to share in the growth of the Chinese market.

By April 1, 2007, a total of 49 foreign institutions had received QFII licenses with quotas ranging from $50 million to $800 million. Around $9.995 billion has been authorized for QFII investment in the Chinese market.

What financial institutions can QFII invest in?

The list includes: Shares listed on China's stock exchanges (excluding B shares); treasuries listed on China's stock exchanges; convertible bonds and enterprise bonds listed on China's stock exchanges; other financial instruments approved by the CSRC; shares held by each QFII in one listed company should not exceed 10 percent of total outstanding shares of the company (a rule also applying to domestic investors); total shares held by all QFIIs in one listed company should not exceed 20 percent of the total outstanding shares of the company.

Who can qualify for QFII certification?

Overseas fund management institutions, insurance companies, securities companies, other assets management institutions approved by the CSRC can qualify. In order to encourage long- and medium-term investments, the CSRC stated that it will give preference to institutions managing closed-end Chinese-focused funds, or pension funds, insurance funds and mutual funds with good investment records in other markets

Who oversees the QFII program?

The China Securities Regulatory Commission and the State Administration of Foreign Exchange regulate the securities investment activities conducted by QFIIs. They are responsible for overseeing all transactions and conducting annual inspections on QFIIs. SAFE is responsible for overseeing businesses tied to foreign exchange operations, such as the approval of QFII investment quotas, issuance of foreign exchange certificates, supervision of account management and foreign exchange settlements (as specified in the Foreign Exchange Control on Securities Investments in China by Qualified Foreign Institutional Investors Tentative Provisions). The CSRC is the approval authority for QFIIs' status. It interprets the rules regarding QFII and takes the role of a general regulator.

How is the application process conducted?

The applicant must mandate a custodian and a broker for their securities trading. The elected custodian files the application for the QFII qualification and the investment quota to the CSRC and SAFE respectively. Current QFII investment quotas range from $50 million to $800 million. At present, 12 banks in China qualify for the custodian business. They include eight domestic qualified custodians: Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of Communications, China Merchants Bank, China Everbright Bank and CITIC Bank. The four foreign qualified custodians are: Standard Chartered Bank, HSBC, Citibank and Deutsche Bank.

(Source: www.chinaamc.com)

 

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