QFII Limit on Sovereign Funds Scrapped By China

To shore up the slumping equities and encourage long-term foreign ownership, China has decided to scrap the ceiling on investments made by the overseas central banks and sovereign wealth funds in the Chinese capital markets. The previous limit was set at $1 billion and as result of this decision, the monetary authorities, SWFs and Central Banks can exceed the same. However, the cap is still applicable to the other qualified foreign institutional investors, as mentioned in the Foreign Exchange State Administration’s official website.

The benchmark index of China, The Shanghai Composite Index saw its biggest rise within the last 3 years after Hong Kong Monetary Authority stated that China may abolish or relax the rule which ensured that the Renminbi Qualified Foreign Institutional Investors keep most of the funds in bonds, on 13th December. After Guo Shuqing became the new Chairman of The China Securities Regulatory Commission, several positive decisions such as pushing companies to increase dividends, cutting trading fees and allowing trust companies to buy equities have been taken.

According to economists, this decision of introducing further long term funds from overseas will help the Chinese market greatly as that may attribute to better confidence of investors on the same. Apart from that, the capital markets will experience stable growth and domestic investors should get robust investment returns as well. Incidentally, only a month ago, the Chinese Government decided to double the total quota for QFIIs. From earlier quota of $30 billion, the same was then increased to $80 billion.

In 2012, SHCOMP has lost 2.2%, however, the MSCI China Index has gained a total of 18% till this date. The MSCI China Index allows overseas investors and thanks to US bond purchases, huge amount of foreign funds poured into the emerging markets. According to analysts, such a global economic situation has triggered the decision of Chinese authorities.

According to the new rule, QFIIs will be able to repatriate their investment returns and principal after the conclusion of the lock-up period. However, the monthly net remittances should not exceed 20% of the onshore assets of last year. Open-ended China funds which could remit funds on a monthly basis earlier can now do the same every week, as mentioned in the new rule. Incidentally, the foreign investors are only allowed to invest in the Chinese capital market through QFIIs.