Concerns about China’s slowing economy and fears of further weakness in its yuan currency will likely keep global investors at bay despite Beijing’s efforts to push foreign funds into its market by making them invest a minimum amount.
The State Administration of Foreign Exchange will likely consider cutting investor quotas under the Qualified Foreign Institutional Investor scheme if an investor does not use up 60-70% of the allotment within a year after it is approved, two sources have told Reuters.
However, fund managers say they will not rush to increase investments just to meet this requirement as investor demand for Chinese assets remains weak after a market rout last year and amid continued uncertainty over the economy. SAFE is also reviewing and verifying the quotas of all existing QFIIs. The process is expected to be completed by June.
“We will not increase our investment under QFII unless there’s demand from clients, even if the regulator has set a minimum level of allotment ratio,” said a fund manager at a Chinese asset management firm in Hong Kong, adding that he had yet to see an improvement in appetite for yuan assets.
“The QFII quota is not as precious as it used to be since there are many new channels now to enter China, such as the interbank bond market scheme and stock connect scheme,” he said.
The yuan fell 4.5% against the dollar in 2015 and is expected to weaken further this year.
Lukewarm demand for QFII also is partly due to its lack of flexibility for years in terms of repatriating funds.
Bond Defaults
“It’s difficult to keep investment above that 60-70% level as market conditions are not good, especially after a series of bond default cases in China,” said an executive in charge of QFII business at a Chinese brokerage.
China launched the QFII scheme in 2002 as the first program for global investors to enter its domestic market. As of April, the outstanding amount of QFII was at $81 billion, only 10% higher than a year ago. Figures on how much of the total quota is utilized are not publicly released.
It has become less important in recent years as Beijing’s launch of the Renminbi QFII, the Shanghai-Hong Kong stock market connection scheme and China interbank bond market programs have given global investors other ways to put money into China’s markets.
“China is trying to get as much capital inflows as possible into the country so that it can offset the outflows,” said Iris Pang, a senior Greater China economist at Natixis.
China is still struggling to stem fund outflows due a sluggish economy, although recent data has showed some easing of outflow pressure, analysts say. Foreign investors are also waiting to see whether the US will raise interest rates again and if the MSCI will include A shares into its benchmark index, Pang said.
