Last week saw Fubon Investment Trust and Capital Investment Trust become the first Taiwanese institutions to be granted qualified foreign institutional investor (QFII) licences by Beijing.

These landmark concessions brought China’s QFII family to 103 members at present, including a net addition of 10 so far this year.

There is clearly room for further QFII approvals, and more than 50 foreign investors are waiting for licences to be granted, including Taiwanese firms Yuanta, Polaris and Cathay.

But Francois Guilloux, director of regional sales at Z-Ben Advisors, does not expect Chinese regulators to allow a sudden wave of QFII approvals. Rather he anticipates a measured approach through to 2013.

“The accumulated investment quota for QFIIs is around $18 billion at present, and China signed a treaty with the World Trade Organisation to set the quota at $30 billion by 2013,” he points out.

He notes that there is a negative correlation between the pace of QFII approval and the performance of the domestic stock market, as regulators want to bring in more liquidity when the market is weak and prevent strong capital inflow when the market is at risk of overheating.

“It also depends on the account balance of China”, said a source whose firm got its QFII licence this year, noting that regulators need to measure and control the balance of capital inflow and outflow.

In 2007, there was not a single QFII approval when the A-share market shot through the roof. A total of 23 and 19 QFII licences were granted in 2008 and 2009, respectively. So by comparison, just 10 approvals so far this year appears to be relatively slow.

The number of QFII approvals also slightly lags those for qualified domestic institutional investors (QDII), given that 12 institutions were granted QDII licences in the first half of this year and 14 QDII products have been approved for fundraising year-to-date.

The investment quota of Taiwan’s Fubon and Capital, set at $200 million and $100 million respectively, still has to be approved by the State Administration of Foreign Exchange, before they can start fundraising.

China Economic News Services noted that the application process for both Fubon and Capital was unusually short at eight months – half of the time customarily associated with the process.

Kevin Liu, chief representative of the Shanghai office of Aberdeen Asset Management Asia, told AsianInvestor that it took his firm more than two years for its QFII licence application to be approved.

Another fund manager described the Taiwanese firms' QFII approvals as "surprisingly quick".

It could be attributed to warming cross-strait ties between China and Taiwan on the back of the Economic Cooperation Framework Agreement (ECFA), which was signed in June this year to foster greater cooperation and reduce tariffs and commercial barriers between the two sides.

The treaty specifies that China provides market access for banks, insurance companies and securities companies from Taiwan. Though there is no specific content on QFII in the text of ECFA, it is seen as an important element under the cooperation between securities firms of both sides, says Desmond An, a Shanghai-based lawyer at Llinks Law Offices. 

Beijing has already permitted Chinese domestic fund managers to invest in Taiwan’s capital markets under its QDII scheme. By the end of the third quarter, three QDII funds – from China AMC, Bosera Fund and China International Fund Management Company – had invested a total of Rmb1 billion into Taiwan’s stock market.

Guanhua Zhang, deputy director of the institute of Taiwan studies at the Chinese Academy of Social Sciences, notes that this first batch of Taiwanese QFII approvals "is an important move to deepen the cross-strait financial cooperation, which has lagged behind other sectors such as trade and commerce”.