China Scraps Foreign Purchase Ceiling on Stocks and Bonds

December 17, 2012 Posted by China Briefing Reading Time: 2 minutes

Dec. 17 – China’s State Administration of Foreign Exchange (SAFE) lifted the previous US$1 billion cap for sovereign wealth funds and banks investing in China’s stocks and bonds on Friday. In a move that underscores China’s commitment to broaden the countries capital markets, SAFE said that foreign government-linked entities could now invest over US$1 billion in China’s stocks and bonds with immediate effect. This paves the way for sovereign wealth funds to boost their investments and holdings in assets in China. In somewhat typical obfuscation, however, SAFE did not specify whether any upper limit was now imposed.

The US$1 billion limit was originally imposed under the qualified foreign institutional investor (QFII) scheme. The change is aimed at boosting liquidity by bringing more funds into China’s capital markets and should have a positive impact on investor confidence. The QFII program has been expanded several times over the past few years, after its initial mechanisms were tested. In 2007, QFII quotas totaled roughly US$30 billion – that number has rising to about US$80 billion this year. China wants foreign institutional investors and pension funds to invest in its bonds and in a limited amount of stocks. There remains speculation that further reforms may loosen up foreign investment in actual Chinese stocks.

Although the news is welcome in many quarters, it still does not provide a solution to the fundamental issue of foreign money allowed into the Chinese stock markets directly. To date, the combined foreign investment in China’s stock markets is equivalent to only 1 percent of the total market capitalization and Friday’s announcement does not impact upon this issue.

Nonetheless, China’s stocks are expected to rally today as a result of Friday’s announcement, with stocks having been moribund and declining in value for the past three years. Stocks have declined 60 percent on average in value since 2007. Monday’s expected rise on the back of this news is no doubt a welcome end-of-year present for many Chinese SOEs looking to boost their asset values for 2012 year -end accounts.

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