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China Scraps QFII Limit on Sovereign Funds, Central Banks

China scrapped a ceiling on investments by overseas sovereign wealth funds and central banks in its capital markets, part of government efforts to encourage long-term foreign ownership and shore up slumping equities.

Sovereign funds, central banks and monetary authorities can now exceed the $1 billion limit that still applies to other qualified foreign institutional investors, according to revised regulations posted Dec. 14 on the State Administration of Foreign Exchange’s website. The statement did not mention a new ceiling or an increase in the total investment quota allowed under the program also known as QFII.

The removal of the investment limit on sovereign investors “marks another step in the direction to gradually open up China’s capital account,” Wang Aochao, head of research at UOB Kay Hian Investment Consulting (Shanghai) Co., said by telephone today. “It’s part of a gradual process. QFII money still accounts for a very small fraction of China’s capital markets.”

China would “definitely” expand the foreign-currency quota provided under the QFII program once the current allotments of $80 billion are filled, Guo Shuqing, chairman of the China Securities Regulatory Commission, said last month. Regulators have since 2003 approved a combined QFII quota of $36.04 billion as of Nov. 30 under the program which allows foreign investors to buy yuan-denominated securities, the SAFE said on Dec. 11.

Confidence Boost

The benchmark Shanghai Composite Index advanced 0.6 percent today, extending a 4 percent gain Dec. 14 amid hopes that increased inflow of foreign money will help bolster stocks.

The head of the Hong Kong Monetary Authority said Dec. 13 that China may relax or abolish a rule that requires Renminbi Qualified Foreign Institutional Investors to keep most of their funds in bonds. The CSRC has cut trading fees, pushed companies to increase dividends and allowed trust companies to buy equities since Guo took over as chairman last year.

Introducing more long-term funds from abroad will help improve market confidence, promote stable growth in capital markets and provide “robust” investment returns to domestic investors, the regulator said in May, a month after the government more than doubled the total quota for QFIIs to $80 billion from $30 billion.

The Shanghai Composite had lost 1.6 percent this year, while the MSCI China Index of mostly Hong Kong-traded shares, open to overseas investors, has gained 18 percent as U.S. bond purchases spurred foreign funds to pour money into emerging markets.

New Rules

QFIIs can repatriate their principal and investment returns after a lock-up period ends, though the monthly net remittances cannot exceed 20 percent of their total onshore assets as of the previous year, according to the Dec. 14 rules. Open-ended China funds can remit funds on a weekly basis under the new regulation, compared with monthly in the previous version announced in 2009.

The Hong Kong Monetary Authority, Norges Bank, Government of Singapore Investment Corp. and Temasek Holdings Pte’s Fullerton Fund Management Co. have all reached the $1 billion limit as of Nov. 30, with QFIIs’ approved quotas totaling $36.04 billion, according to SAFE, the currency regulator. Foreign investors can only invest in capital markets through QFIIs.

Qatar’s sovereign wealth fund was applying for a QFII license and a $5 billion quota to invest in China, the China Securities Journal said on its website in June, citing Energy and Industry Minister Mohammed Bin Saleh al-Sada.

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