China Eases Rules on Foreign Funds in Bid for MSCI Inclusion

Updated on
  • QFII allocations no longer subject to a $1 billion cap
  • Open-ended funds can withdraw or bring in money daily

China relaxed restrictions on foreign funds as policy makers seek to gain entry to MSCI Inc.’s global stock indexes and bolster the nation’s financial markets after record capital outflows.

The State Administration of Foreign Exchange said fund managers approved under its Qualified Foreign Institutional Investor program will no longer need to apply for quotas, with maximum allocations instead being linked to assets under management and subject to a ceiling of $5 billion. Open-ended funds will also be able to shift money in and out of the nation’s stocks on a daily basis.

Chinese authorities have been pushing for an MSCI endorsement -- sending a delegation of regulators to Europe and the U.S. last year to make the case for inclusion -- as President Xi Jinping’s government seeks to elevate the status of mainland markets on the world stage and make the yuan a more international currency. Attracting foreign capital has taken on greater urgency in recent months after the yuan weakened and local shares tumbled, though analysts cautioned that Thursday’s rule change is unlikely to attract major inflows any time soon and doesn’t guarantee MSCI inclusion.

“They want more dollars to come into China,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. “China risk aversion is elevated due to uncertainty about foreign-exchange policy so I expect little short-run impact from the measure. As currency uncertainty fades, the move will be positive for equities and fixed income.”

While the easing addresses some of the issues highlighted by MSCI, remaining curbs include limits on the repatriation of assets. SAFE also said it retains the authority to adjust rules for outflows based on market conditions.

The index provider decided to leave China’s domestic shares out of its equity gauges in June, saying it would work with the country’s regulators to establish policies that resolve the “remaining accessibility issues.” Those included giving investors quotas commensurate with the size of their assets under management, improvements in liquidity and further clarification of share-ownership rules.

Chia Chin-ping, a Hong Kong-based managing director at MSCI, didn’t immediately respond to calls.

Volatility in China’s stocks and currency is likely to be another obstacle, according to Xia Le, Hong Kong-based chief Asia economist at Banco Bilbao Vizcaya Argentaria SA.

State Intervention

The benchmark Shanghai Composite Index has tumbled 22 percent this year, making it the world’s worst performer, as traders unwound bullish bets on concern valuations were too high given the economic slowdown. The central bank has stepped up intervention in the foreign-exchange market over the past month and tightened capital controls after the yuan slumped to a five-year low. The cost of insuring Chinese sovereign debt against default climbed to the highest level on Wednesday since a record cash crunch in June 2013.

"The new rule makes it easier for foreign institutions to move their funds in and out of China, which was one of the hurdles thwarting an inclusion last year," Xia said. "However, the chance for an inclusion is not significant this year, even though this change is in place, because China’s financial markets will likely continue to be highly volatile in the near term."

The previous cap on institutional investments was $1 billion, although officials had already allowed that limit to be breached when they gave Fidelity Investments Management (Hong Kong) Ltd. a $1.2 billion quota in 2015. QFII funds can now be pulled from China after three months, down from a year previously, provided the net withdrawal in a month doesn’t exceed 20 percent of assets held at the end of the previous year, SAFE said.

For Meng Xiaoning, president of Tianfeng Securities Co.’s Hong Kong unit, more work needs to be done to satisfy international money managers.

“I don’t think the new rule will directly promote A shares’ inclusion into the MSCI index," Meng said. “There are still a lot of things to be done in terms of legal framework and market infrastructure.”

— With assistance by Tian Chen, and Kyoungwha Kim

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