Safe slashes QFII licence activity

China's State Administration of Foreign Exchange awarded $150 million in QFII quota in April, the lowest in almost two years. Analysts expect this trend to continue.
Safe slashes QFII licence activity

China’s State Administration of Foreign Exchange (Safe) awarded total qualified foreign institutional investor (QFII) quota of just $150 million in April, the lowest monthly amount in almost two years, amid worries over hot money flows.

Taiwanese fund manager Fuh Hwa Securities Investment Trust and Switzerland-based EJS Investment Management received $100 million and $50 million, respectively.

The smallest QFII total monthly quota previously issued was $100 million handed to Royal Bank of Canada in August 2010.

Fuh Hwa can now invest $200 million into Chinese securities as a result of the new quota. It first received quota in December 2011.

Separately, Safe took back $13 million of quota from Ashmore EMM, the US subsidiary of UK fund house Ashmore, shrinking its total quota to $37 million.

In addition to the smaller amount of quota, issuance of QFII licences have slowed. Last week the China Securities Regulatory Commission handled out three licences, and only eight licences were issued from February to April. This compares with 21 licences being handed out between November and January.

This slowdown comes on the back of Chinese concerns about hot money inflows. Safe notes that as major economies launch stimulus programmes and push interest rates down to boost global liquidity and increase risk appetite, there has been a large capital push into the mainland.  

“The approval of QFII is highly related to the macro environment,” says Cindy Qu, senior analyst at Shanghai-based consultancy Z-Ben Advisors. “QFII approval will affect capital account inflows. Last year, the pressure for hot money inflow was smaller, but this year pressure has emerged.”

As a consequence, China is less willing to open its capital market to foreign investors, market sources say.

Capital has poured into China since the start of the year through a variety of channels, including exports, FX purchases and rapid credit expansion, according to HSBC. A 93% surge in mainland exports to Hong Kong and stronger-than-expected credit numbers have raised concerns, adds the bank.

This month Safe released new rules to curb currency speculation, which state it will increase scrutiny of capital inflows by exporters. The regulator will also closely monitor any unusual capital inflows and punish entities in breach of the regulations.   

As at the end of April, Safe has awarded a total of $41.9 billion in QFII quota to 198 QFII licence holders.

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