BOFIT Viikkokatsaus / BOFIT Weekly 2019/06

At the end of January, the China Security Regulatory Commission (CSRC) published draft legislation geared to increasing foreign investment in Chinese securities. The proposal calls for consolidating the current investment quota system, streamlining permitting of foreign agents and offering a wider selection of investment instruments.

The draft bill would integrate the qualified foreign institutional investor (QFII) and renminbi qualified foreign institutional investor (RQFII) programmes and simplify the permitting processes. In addition to publicly listed shares and bonds, it would also let existing qualified investors invest in a broader range of financial instruments such as financial and commodity market derivatives.

The QFII programme, launched in 2002, was complemented in 2011 with the RQFII programme, which allows investment of yuan acquired outside mainland China in Chinese securities. These programmes have long served as the main conduit to China’s stock and bond markets for foreign investors. In mid-January, the QFII programme quota was doubled to 300 billion dollars, even if only about 100 billion dollars of the old quota was employed. The new RQFII programme quota is 1.94 trillion yuan (USD 280 billion), and again, less than 650 billion yuan (nearly USD 100 billion) of it has been used. Since 2015, the stock and bond trading connections between mainland China and Hong Kong exchanges, as well other deregulation, have reduced the relative significance of the QFII and RQFII programmes as vehicles for bringing foreign capital into China.

While China’s equities and debt security markets are the world’s third largest after the United States and Japan, foreign investors only account for about 2–3 % of Chinese market participation. The attractiveness of China to foreign investors is likely to be enhanced, however, once western credit rating agencies gain access to Chinese markets. Indeed, S&P Global was last month granted permission to begin providing credit ratings for bonds in China’s interbank market. International interest should also be boosted by the gradual introduction of Chinese securities to international financial market indices. Last June, share index producer MSCI started introducing with a tiny weighting of mainland Chinese shares into its global indices. Bloomberg recently announced that starting in April it will gradually add Chinese government and policy bank bonds to the Bloomberg Barclays Global Aggregate index. The move is a first step in incorporating Chinese debt securities into international benchmark indices. Other index producers have announced similar plans.

China’s efforts to open up its financial markets have focused on attracting investment into China. Portfolio investment outflows from China are still tightly regulated, however. Aside from the Stock Connect programme, Chinese can invest in foreign securities in Hong Kong and China under the 2015 reciprocal Mutual Recognition of Funds (MRF) arrangement. Fewer than two dozen funds, however, currently are licenced to market themselves to Chinese investors, while in Hong Kong foreigners have been able to invest in roughly 50 Chinese funds. After a long permitting process, JPMorgan Asset Management last week won approval to market for two funds directed at Chinese investors under the MRF framework.