China removes quota restrictions on QFII, RQFII to boost financial opening

By He Shuquan
0 Comment(s)Print E-mail, September 16, 2019
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On September 10, China announced a new policy to boost financial reforms and opening-up and strengthen domestic financial markets. This removes the investment limits for Qualified Foreign Institutional Investors (QFII) and Renminbi (RMB) Qualified Foreign Institutional Investors (RQFII). 

Since the launch of QFII in 2002 and RQFII in 2011, more than 400 institutional investors from 31 countries and regions have used these channels to invest in China's financial markets.

The abolition of the investment quota restriction for qualified foreign investors serves the new pattern of comprehensive opening up to further meet their needs. This is in line with China's reforms to create a freer climate in the field of foreign exchange administration. 

The Chinese foreign exchange system is mainly established on its foreign trade regime. Before the reform and opening-up program began in the late 1970s, China's foreign trade was mostly controlled by a handful of State-owned companies. Accordingly, the foreign exchange regime was closely controlled by the central government.

There have been several landmarks in the evolution of the Chinese foreign exchange reform and opening-up since 1979. In March of that year, the State Administration of Foreign Exchange (SAFE) assumed the function of foreign exchange control and adopted a dual exchange rate system. 

There was a compulsory foreign exchange surrender requirement to the government and a foreign exchange retention scheme. At the beginning of 1994, China adopted its most comprehensive reform package to abolish the foreign exchange retention scheme. However, foreign funded enterprises were still required to comply with the foreign exchange balancing requirements. 

The schemes of Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) have played an important role in facilitating foreign investment. 

QFII was a transitional arrangement allowing foreign institutional investors with certain qualifications to have access to the Chinese capital market, investing in a limited scope of cross-border securities products, in the context of an incomplete free flow of capital accounts. 

Initiated in 2011 as part of an effort to internationalize the Chinese currency, RQFII allows use of RMB funds raised in Hong Kong by the subsidiaries of domestic fund management companies and securities companies there to invest in the mainland securities market.

The QFII scheme started with an initial quota of $20 billion and the RQFII scheme began with an initial quota of 20 billion yuan. Over time, the eligibility requirements for both schemes have been relaxed and the cap limit for individual QFII's quota was increased. 

A simplified quota granting process was introduced in 2016. Only when demand goes beyond the base quota is SAFE approval required. In January 2019, the total QFII quota was doubled from $150 to $300 billion while the RQFII quota was set at 1,940 billion yuan.

This new policy removing the quota limit will provide more convenience to foreign investors to access the Chinese bond and equity markets. They will find it more convenient to participate in the domestic financial and capital market. 

Meanwhile, SAFE will continue to deepen reform of foreign exchange administration, take effective measures to expand opening up, support foreign investors to invest in the Chinese financial markets, and enhance the facilitation of cross-border investment and financing.

With the implementation of a series of intensive financial reform and opening-up measures, foreign investors will be able to enter the Chinese market in a more active way, and foreign financial institutions are expected to speed up their investment.

He Shuquan is a professor from School of Economics, Shanghai University.

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