The raising of the $1 billion ceiling on holdings in China’s domestic stock market by foreign sovereign wealth funds, central banks and governments is a typically small and incremental move. It is another piece in the 10,000-part jigsaw puzzle that is China’s financial reform. Perhaps not the most important piece, but a piece nonetheless.
The original idea of the Qualified Foreign Institutional Investor (QFII) program was to boost confidence in the domestic stock market, which has more than halved since its peak of November 2007, by opening it up via QFII investment funds to a small group of rich but friendly, long-term investors, such as Qatar’s sovereign wealth fund, Qatar Holdings, and the Hong Kong Monetary Authority. But not that much money had flowed in, $36 billion of the $80 billion initially authorized.
That is less than 1% of the market’s total capitalization. Investors haven’t been overjoyed by the funds’ performance, tax uncertainty and high fees. Lifting the $1 billion ceiling for an institutions holding is an encouragement to the willing to take up more of the $80 billion quota, which is not being changed under the new regulations. Nor has the State Administration of Foreign Exchange (SAFE), which promulgated them, said what the new upper limits will be, just that each application will be considered on its individual merits.
In addition, China may also relax a rule that requires yuan-denominated QFII funds to be invested 80% in bonds. What remains to be seen is whether the authorities will press ahead with proposed tax changes to lessen the favorable tax treatment QFIIs get compared to domestic investors. There isn’t much evidence to suggest that China’s stock market is sufficiently attractive to foreign investors to support increasing the tax take from them while still having them expand the amounts they are prepared to invest.