THE decision by China's securities regulator to increase quotas for foreign funds investing in yuan-denominated shares is viewed as the next step in the process of transforming the yuan into an international currency.

Foreign funds are allowed to invest in domestic stock and bond markets under two programs: the Qualified Foreign Institutional Investors program allows investors to convert US dollars into yuan for investment in local markets. The Renminbi Qualified Foreign Institutional Investors program allows funds to invest yuan they have accumulated in Hong Kong.

The China Securities Regulatory Commission announced on Tuesday night that the quota for the QFII program has been increased by US$50 billion to US$80 billion. The quota for RQFII more than doubled from 20 billion yuan (US$3.17 billion) to 50 billion yuan.

Internationalize the yuan

Raising the quotas are "unambiguous signals of China's intent to attract more offshore investors and a sign that market investments will play a key role in the government's plan to internationalize the renminbi (yuan)," business consultancy Z-Ben Advisors commented in a report.

The additional 360 billion yuan of new funds may provide a big boost for China's capital markets, which haven't been performing well since 2009. China's stock markets yesterday posted their biggest daily increases since February on the quota news.

Launched in December 2011, RQFII requires that 80 percent of the program's quota be invested in bond markets, with the remainder to go into stocks. So far 21 institutions have been approved to operate under the program.

However, the new investment channel has not proven all that popular with foreign investors. Only about half of the original quota has been invested so far, according to Chinese media reports.

Analysts blame the underdeveloped status of China's bond market, which is small, opaque and offers low returns.

Some foreign investors may be reticent to invest in China because they are not clear about how the capital gains tax would affect them, said Anthony Skriba, project manager at Z-Ben Advisors.

Then, too, yuan products offered in Hong Kong, such as dim sum bonds, are more diversified and more attractive to foreigners, he added.

The new RQFII will extend investment channels to include exchange-traded funds on stock exchanges. Institutional investors will be able to set up yuan-denominated exchange-traded funds on the Hong Kong Stock Exchange.

As for the older program, the QFII was set up in 2002 and now has 158 approved investors. About four-fifths of the allocated quotas have been used. As of March 23, the total assets of QFII accounts reached 265.6 billion yuan.

Dong Dengxin, head of securities research institute at Wuhan University of Technology, said regulators are hoping that increased participation by foreign investors will help China's A-share market develop.

That may be a long way off. QFII now accounts for only about 1 percent of the total stock market capitalization.

 

Source:shanghaidaily