The Chinese stock markets of Shanghai and Shenzen have been largely off-limits to foreign investors, with the partial exception of those from Hong Kong, Singapore, UK and France who have been granted Renminbi Qualified Foreign Institutional Investor (QFII) status. Recently, we received news that the Chinese are about to allow American investors to buy "A" shares as RQFII status is about to be extended to Americans as well. Here is a brief description of RQFII from
China Daily:
Qualified Foreign Institutional Investor (QFII) Scheme is a transitional arrangement that allows institutional investors who meet certain qualification to invest in a limited scope of cross-border securities products, in the context of incomplete free flow of capital accounts.
Foreign investments in China are restricted due to foreign exchange control. The quota, products, accounts, and fund conversions are strictly monitored and regulated. QFII scheme was introduced in 2002, allowing foreign investor’s direct access to China's capital market.
When implemented, RQFII for US investors will supposedly be the second largest allocation after Hong Kong's. Still,
$38 billion does not seem an awful lot considering that the capitalization of the Shanghai Stock Exchange alone, for instance, is $3-trillion-something. Anyway:
China will give the United States a 250 billion yuan ($38 billion) investment quota for the first time to buy Chinese stocks, bonds and other assets, officials said on Tuesday, deepening financial ties and interdependence between the world's two largest economies. China has given such quota allocations to several countries, including the UK, France and Singapore, but this would be the biggest given to a single jurisdiction after Hong Kong.
Why the seeming change of heart after all this time? With PRC stock markets floundering to be honest, there is some
hope that American money can help buoy them. Still, governance concerns remain:
China's regulators have been pushing to expand foreign investors' access to domestic financial markets to make its markets broader and attract more capital inflows. But foreign interest has waned after a near meltdown in Chinese stock markets last year and heavy-handed official intervention to shore them up.
"I would imagine that investors would look for certain financial reforms in order to dive in," said Gregory Peters, a senior investment officer at Prudential Fixed Income with more than $621 billion of assets. "A consistent application of the rule of law is paramount. ... Not sure China is quite there yet."
Another is that, having been
denied last year for inclusion in the MSCI index, Chinese officials want to show greater capital market access for foreign investors since it is one of the conditions for inclusion. Formally, these are "capital mobility restrictions." The logic for inclusion, though, remains to attract additional foreign investment since index-tracking funds--of which there are more and more--would have to buy PRC-listed shares were these to be included in MSCI indices:
Another big catalyst for foreign investment flow is on the horizon. Index compiler next week MSCI is expected to announce whether it would include Chinese shares in its benchmark index.
My two cents is that $38 billion is not all that much in the wider scheme of things. While Chinese mainland stocks are still somewhat pricey in price-to-earnings terms at the moment, there will likely be good entry points soon for US investors keen on diversification. So, the quota will probably be used up; just don't expect a mad rush but something more gradual.
