As AsianInvestor went to press, news emerged China’s securities regulator had lifted the investment quotas for both qualified foreign institutional investors (QFIIs) and renminbi-QFIIs.
In essence, the 292 approved foreign investors, which include fund management companies and asset owners, can now invest as much money as they wish into China’s equity and bond markets.
That sounds like a big shift in policy; in truth it’s more symbolic. Since the opening of the Stock Connect programmes between Hong Kong and Shanghai and Shenzhen, the QFII quotas have become less important, and in fact they are nowhere near fully utilised. However, they still encompass a broader variety of instruments than the Connect alternatives.
China’s local markets have also proved less appealing to foreign investors of late. Last year its stock markets suffered a rout, and while they’ve done well so far in 2019, US fund managers and asset owners have been leery about visibly investing more in Chinese assets at a time when the country is in the middle of a trade dispute. Nobody wants to be on the receiving end of the US president’s itchy Twitter fingers.
But this reform is likely to outlast these immediate concerns. In essence, Beijing is further edging open the door to its capital markets, hoping that more investors will accept the invitation. At the same time it is reforming its fund industry domestically, to give foreign fund managers a leg-up (see page 22).
Doing so makes sense. Index providers, led by MSCI, have started to add A-shares to their global benchmarks. To date they have only added a small proportion of the market cap of leading Chinese companies, but those proportions will rise over the next couple of years.
Similarly, bond indexes are beginning to introduce renminbi debt into their benchmarks. On September 4 news broke that JP Morgan intends to add onshore Chinese bonds to its widely followed indexes.
That process will force international investors to access more Chinese shares and bonds. Having unlimited QFII quotas will make that process easier for those that have them.
There are, to be sure, more questions that need to be addressed. Beijing has had an unwelcome willingness to tamper with its markets when they experience sudden drops, while US anger over intellectual property theft is based on very real examples.
China needs to do a lot of work to encourage better corporate governance and the status and integrity of onshore research, particularly in its credit ratings sector, if it is to attract more foreign investor capital flows.
But if foreign investors enter with a genuine focus on environmental, social and governance standards (ESG), both to pick out likely winners and to conduct a basic level of risk management, they can begin shifting China’s investment culture to reward good behaviour.
This will take time. But, in the years to come, investors may be able to persuade the country’s businesses to pull back from some of the behaviour that threats and tariff-rattling have thus far failed to achieve.