QFII quota expands to $30 billion

Anticipating the introduction of a second bourse and futures market, foreign fund managers are upbeat about the long-term outlook for the A-share market.
China's State Administration of Foreign Exchange (Safe) says it has expanded the QFII program quota from $10 billion to $30 billion.

The new quota will be used to encourage long-term investments by foreign institutions. Officials say they hope the increased of foreign institutions will help stabilize the Chinese market volatility over the long term.

The chairman of the China Securities Regulatory Commission, Shang Fulin, hinted on the planned increase in quota in mid-October. The agreement was rumoured to have been reached at a Strategic Economic Dialogue in May, where American officials had pushed for greater access into the Chinese capital markets.

Liu Yongfu, Vice Minister of the Ministry of Labour & Social Security, gestured by rubbing his two fingers at a conference in Hong Kong today, saying many foreign pension funds have already made a good fortune out of China. However, the ministry has no reciprocate plans for overseas allocation for its social security and the enterprise annuity scheme that it oversees.

Other than the QDII scheme, which allows retail customers to invest overseas, only the sovereign wealth fund, China Investment Corp. and the National Social Security Fund û a reserve fund with no designated beneficiary - are allowed to allocate internationally.

The original $10 billion QFII investments are now worth an estimated $40 billion, following two years of bull run in 2006 and 2007. The earliest participants are dominated by brokers. Institutional investors such as insurers, pensions, fund houses and sovereigns were later allocated more quota over the course of 2005 û a time of a prolonged retracted market after state companies and floatable share reforms that had initially flooded the market with excessive shares and unwanted labours.

Pictet Asset Management was the last institution that was given a QFII status, but has not yet been allocated an investment quota. Managing director and regional head Amy Cho says she is delighted to see the new increase. But she predicts the new quota will be too insubstantial for a new fund. Instead, the quota will be used as A-share allocation for its existing emerging market or greater China fund.

She says Pictet has no plan to set up a joint venture in China at this stage because of complications with the firmÆs partnership structure in Switzerland.

Meanwhile, authorities have not mentioned any new plans regarding the B-share market, which lists mainland companies' stocks in foreign currencies. Stuart Leckie, a senior advisor at FTSE, commented previously that "the B-share market has outlived its usefulness" and that it too should be opened to foreigners for fund raising or investments as China expands its QFII program.

Over the past 12 months, the Shanghai Composite Index has risen from its lowest level at 2,180 points on November 12 last year to its peak at 6,092 points on October 16 this year. It has since seen a correction that brought it to a trough at 4,759 points on November 27 this year but recovered to 5,162 points on 10 December.

While punters worldwide have taken the recent correction in the A-share market as a sign for a grim year to come, most QFII investors are still upbeat for the prospects in 2008. Among the most important changes that will take place is the introduction of a second board in the Shenzhen Stock Exchange that will attract close to 1,000 small-medium companies to list and the launch of a new futures market.

See AsianInvestorÆs December issue for top QFII managers' outloook for 2008, including fundamentals, price-earnings valuation and renminbi pressures.
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