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SAFE Relaxes QFII Investment Quota to Stem Capital Outflows

The State Administration of Foreign Exchange (SAFE) has announced that the investment quota ceiling for individual QFIIs (Qualified Foreign Institutional Investors) will be relaxed and the lock-up period will be shortened from one year to three months. Market players in general welcome this news, saying that further liberalisation of the capital market is a positive move which can attract more capital inflow to offset the pressure currently brought about by the continuous capital outflows from the mainland.

Under the Provisions on Foreign Exchange Administration of Domestic Securities Investment by Qualified Foreign Institutional Investors issued by SAFE on 4 February 2016, which came into effect on that date, reforms were introduced to the foreign exchange administration system for QFIIs, relaxing the management of the inward remittance of funds by QFIIs.

On QFII investment quota ceiling, which has aroused much concern, the Provisions state that the unified investment quota ceiling set on individual QFIIs will be revoked. Instead, a certain percentage of the asset size of or asset size managed by the QFII will be used as the base for calculating its investment quota (base quota). This move will provide more room for foreign institutions to invest in China.

Besides, to enhance facilitation for QFIIs to invest in the China market, the Provisions put forward that applications by QFIIs for investment quota within the base quota will be subject to management by record filing. Only investment quotas exceeding the base quota will require examination and approval by SAFE. At the same time, in order to further facilitate the inward and outward remittances of funds, the requirement for setting a deadline on inward remittance of investment capital by QFIIs will be removed. From now on, QFIIs will be allowed to subscribe or redeem open-ended funds on a daily basis.

Apart from liberalising the investment market and implementing facilitation measures, the attraction of the market itself is equally important. To this end, the Provisions provide that the lock-up period of the outward remittance of capital by QFIIs is to be shortened from one year to three months, while the requirement for outward remittance of capital in batches and by instalments remains. This means that the liquidity QFII funds will be greatly increased.

After the new rules were unveiled, market players opine that the liberalisation measures will quicken the pace of renminbi convertibility under the capital account. At present, China needs to encourage capital inflows in order to offset the drop in foreign exchange reserves and the capital outflows. Market sources generally welcome the new rules as “really timely”.

For the full text of the Provisions in Chinese, please see:

http://www.gov.cn/xinwen/2016-02/04/content_5039341.htm

Content provided by Picture: HKTDC Research
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