24 Sept 2019
The Development, Role, and Influence of the Qualified Foreign Institutional Investor System
As a way for a developing economy to attract foreign capital and open up capital markets at a time when there’s no full currency convertibility and no open capital account, the Qualified Foreign Institutional Investor (QFII) system was implemented in several emerging markets, first in Taiwan, followed by Brazil, Thailand, South Korea, Malaysia, and India. China implemented QFII in November of 2002. Recently, China announced the cancellation of QFII limits, the approval process for individual institutions, and RQFII pilot countries (or regions), marking a new chapter in the opening up of China’s capital markets. This paper intends to start from the development process of the QFII system in Mainland China, analyze its main functions, and explore the influence and prospects of reform and the role of Hong Kong.
I. QFII Process in China: Development and Improvement
The opening of China's capital market is a process of building a market system through markets and internationalization, and is constantly converging with international regulations and rules. It is also a process that is two-way, gradual, and within risk limits. QFII is an important example of “bringing in”, and its development has witnessed the whole process of China's capital market opening from scratch to a smoothly and orderly state. To sort out the historical context of the development of QFII in China, the author divides it into four main stages:
1. Start and suspension (2002-2006). After China’s stock market became the most dynamic Asia-Pacific market in 10 years of development, " Provisional Measures on Administration of Domestic Securities Investments of Qualified Foreign Institutional Investors (QFII)" was issued in November of 2002. The initial limit was only US$ 4 billion. The following year, in July, QFII’s first transaction was completed, and the system was officially operational. In August of 2006, relevant management measures were introduced, along with the entry of retirement funds, charity funds, endowment funds, trust companies, and government funds. By the end of the year, due to the US$ 10 billion restrictions, QFII approval was suspended.
2. Restart and innovation (2007-2011). In October of 2007, QFII restarted new approvals, and the year-end limit went up to US$ 30 billion. In September of 2009, QFII investment foreign exchange regulations were introduced, and the limit for single-institutions was lifted to US$ 1 billion. The following year, China Securities Regulatory Commission outlined principles for QFII asset allocation distribution. In May of 2011, QFIIs were allowed to participate in stock index futures trading. In August, the RMB Qualified Foreign Institutional Investor (RQFII) system was licensed to pilot in Hong Kong with an initial quota of RMB 70 billion. As a product of China's unique institutional innovation and RMB internationalization, RQFII’s birth created new vitality for the development of QFII.
3. Expansion and loosening in parallel (2012-2017). QFII and RQFII total quotas were increased to US$ 80 billion and RMB 200 billion respectively, in April and December of 2012. Institutional stock ownership limits rose from 20% to 30%. In July of 2013, QFII quota rose to US$ 150 billion. In 2016, upper limits for individual institutions and QFII/RQFII equity allocation ratios were removed, and the lock-up period was shortened to 3 months from one year. In 2017, RQFII quota was expanded to RMB 500 billion.
4. Accelerated institutional optimization (2018 to present). Since last year, the QFII system has been upgraded significantly. In June, the monthly remittance limit and lock-up periods were cancelled at the same time. Risk hedging arrangements and the quota management process became more optimized. After QFII quota was raised to US$ 30 billion in January and IMF obtained RQFII qualification in March, regulators proposed several reform ideas, including merging QFII and RQFII, relaxing access, streamlining application process, shortening time constraints, expanding the scope of investments, and optimizing fund management and risk management. On this basis, the elimination of the three major restrictions of QFII can be described as a matter of course.
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