China's securities regulator is studying plans to allow hedge funds and private equity funds to join the nation's Qualified Foreign Institutional Investor program to further open the country's capital market, industry sources said yesterday.
The China Securities Regulatory Commission is consulting investment bankers regarding the introduction of more types of QFIIs and will set separate criteria after conducting a feasibility study, according to people familiar with the matter.
The initiative came after authorities in early April raised the combined QFII quota by US$50 billion to US$80 billion and pledged to further expand the project, which lets overseas financial institutions trade yuan-denominated A shares and bonds on the Chinese mainland.
"The regulator's attitude is open and is willing to permit more qualified investors as long as they abide by rules and regulations," a Shanghai-based banker close to the CSRC said. "They are thinking about introducing hedge funds and even private equity companies. But the prerequisite is that risks must be controlled."
Under the QFII program, overseas institutions have to receive an investment license from the securities regulator and obtain a quota from the foreign exchange regulator before they can invest in A shares. Currently, major QFIIs include brokerages, banks, mutual funds and insurers. Officials at the CSRC were not available to comment yesterday.
The pace of luring QFIIs has apparently accelerated in recent months. The State Administration of Foreign Exchange approved US$3.61 billion in quotas for 28 overseas institutions between January 1 and April 16, bringing the total quota issued to US$25.19 billion for 133 QFIIs, it said in a statement.
Sources said that as China has already allowed QFIIs to trade stock-index futures, which are widely seen as a hedging tool, the time is right to let hedge funds enter the mainland market, creating another channel of capital inflow.
"That's logical," another investment-banking source said. "Hedge funds are a big source of capital. But as far as I know, regulators are cautious about the move. They want to ensure such deregulation won't cause any panic on the market."
The sources also said regulators will prefer to offer bigger QFII quotas to long-term investors and may consider lowering the capital threshold on QFII applicants. But it may prove difficult for regulators to raise the individual quota for each QFII. China last raised individual quotas for QFIIs to US$1 billion from US$800 million in 2009.
Liu Yu, an Orient Securities Co trader, said: "Considering the size of QFIIs, they won't likely drive the market up on their own in the short term."