China plans to lower the entry barrier for foreign institutional investors looking to buy publicly traded securities in mainland exchanges, as part of reforms to add depth to the country’s capital markets.
The government will cut the minimum requirement on assets under management to $500 million from $5 billion for companies seeking a license under the Qualified Foreign Institutional Investor program, the China Securities Regulatory Commission said in a statement on its website yesterday. The regulator also said it will allow them to invest in the country’s interbank bond market.
The changes are “very positive,” Mark McCombe, Asia-Pacific chairman of BlackRock Inc., the world’s largest asset manager, said in Hong Kong. “I think the underlying objective is to get more investment into China.”
CSRC Chairman Guo Shuqing, who took over last year, wants to restore confidence in the stock market by encouraging entries of more institutional investors and cracking down on over-pricing of initial public offering shares and insider trading. The benchmark Shanghai Composite Index slumped a combined 33 percent in 2010 and 2011.
Introducing more long-term funds from abroad will help improve market confidence, promote stable growth in China’s capital markets and provide “robust” investment returns to domestic investors, the CSRC said on May 18. QFII, introduced in 2002, allows approved foreign investors to buy and sell yuan-denominated securities.
Foreign investors will be required to have at least two years of operational experience under the new rules, compared with the current minimum requirement of five years, according to yesterday’s statement. Qualified investors will also be allowed to hold a combined maximum 30 percent stake in any single yuan-denominated stock, compared with 20 percent previously, the CSRC said.
“The government wants to attract more investors and liquidity into the market,” said Chen Liqiu, a strategist at Jianghai Securities Co. in Shanghai.
The Shanghai Composite has dropped 6.8 percent from this year’s high set on March 2 on concerns about the country’s slowing economic growth. China’s manufacturing may shrink for an eighth month in June, according to a report today from HSBC Holdings Plc and Markit Economics.
The Shanghai gauge has erased nearly two thirds of its value since its peak in October 2007. China’s 50 million individual investors lost an average of 40,000 yuan last year, according to a May 9 People’s Daily report. The Shanghai index slid 1 percent to 2,271.04 as of 10:32 a.m. local time, heading for its lowest close since March 30.
Chen said the move to lower the entry threshold for overseas investors may have limited effects on the market because valuations of yuan-denominated shares are not attractive as Chinese equities in other overseas markets.
Stocks in the Shanghai measure are valued at 9.89 times estimated earnings, compared with the multiple of 7.65 times for the Hang Seng China Enterprises Index of Hong Kong-listed Chinese companies, according to data compiled by Bloomberg.
“Foreign investors may find more appeal with H-shares as their valuations are lower,” Chen said.
Chinese insurers and brokerages will benefit most from the regulator’s plan to expand overseas investors because of potential capital inflows, Hui Miao, an analyst at Deutsche Bank AG, wrote in a note dated yesterday.
CSRC’s Guo has increased the amount of stocks foreign investors can buy in the otherwise-closed market, urged listed companies to pay more cash dividends to shareholders and made changes in how initial public offerings are priced.
The CSRC and the country’s two exchanges, in Shanghai and Shenzhen, have also announced plans to cut transaction costs for stock purchases and sales, and tightened accounting scrutiny on companies that are facing delisting.
The regulator has awarded 172 licenses to foreign investors under the QFII program so far, among which 145 have been given a quota, according to yesterday’s statement. Public feedback is being sought for the revisions, it said.
“I think what’s happening in the regulatory environment is very positive,” McCombe said.