China, with a population of over 1.3 billion people, is the world’s fastest growing major economy with a steady economic growth rate that could reach an estimated 10.7% for 2006. I recently visited both
Shanghai
and
Beijing
and am continually amazed at the pace of change in general. New buildings continue to pop up everywhere and the securities market is ever changing. The Qualified Foreign Institutional Investor (QFII) scheme continues to evolve and improve, and with
China
’s entry into the WTO, things should only get better from foreign investors’ view points. What is interesting, and what I find rather amusing, is how people closely involved with the stock market and foreign investment, but from different regulatory bodies, will talk or share such different amounts of information on the changing investment environment. In fact the location of the meeting (board room vs. conference room) and the title of the individual seem to greatly affect the details shared. Next time I am in
China
I must see if casual lunch meetings in social settings yield me any additional, non-public information.
The main topic of conversations was the new Administration Measures of Domestic Investments of Qualified Foreign Institutional Investors (the Measures) that were jointly promulgated by the China Securities Regulatory Commission (CSRC), People’s Bank of China (PBOC) and State Administration of Foreign Exchange (SAFE). Effective September 1, 2006, the CSRC is the only body so far to release implementation measures relating to the new Measures. The market is still awaiting implementation measures from SAFE, China Securities Depository and Clearing Corporation Ltd (CSDCC) and the Stock Exchange. SAFE has submitted their final draft of the revised rules to the governors for final approval but we continue to wait for the thumbs up.
The updated measures include:
· Lowered entry requirements for Fund Management and Insurance Company type QFIIs. These types of QFIIs still need to have been in the business for at least five years however assets under management (AUM) need now only be USD 5 billion rather than 10 billion. The measures now also specify entry requirements for Pension Funds, Endowment Funds, Charity Foundations, Trust Companies and Government Investment Companies as five years in business and USD 5 billion in AUM.
o COMMENTARY: Verbal discussions indicate that QFIIs may be allowed six months to initially remit their approved quota rather than three, and will be allowed to invest in the market after remitting USD 20 million, rather than 50 million.
· Multiple securities accounts allowed at the CSDCC. Three types of accounts will be allowed: QFII proprietary trading account, QFII’s clients trading as a nominee account and QFII-Fund accounts for its underlying long term investment funds. The beneficial ownership will be recognized as belonging to each fund.
o COMMENTARY: The number of securities accounts allowed will be dependent upon SAFE’s approval of corresponding RMB cash accounts. The latest update from SAFE is that they will allow only one proprietary account, one nominee account and multiple QFII-fund accounts, however each fund would be required to have at least 70% of its size allocated to China A shares. This information would need to be specified in a prospectus or other similar document. This threshold would apply to the fund’s initial asset allocation, however it is unclear if the threshold would need to be maintained at all times.
· Introduction of a foreign exchange account that would be used for quota remittance and repatriation.
o COMMENTARY: It is expected that foreign currency (FCY) will be allowed to sit in the account for up to nine months. Once conversion is done from FCY to RMB, the funds will need to be invested in the market within 10 business days. Once the foreign currency is converted, it cannot be converted back to FCY. Should a situation arise where the RMB is not invested, SAFE will determine on a case by case basis how it will be handled.
· Introduction of allowing up to three brokers per market.
o COMMENTARY: Although three brokers may be allowed at the QFII level, it is expected that only one broker will be allowed per sub account. This is due to Stock Exchange system constraints that only allow securities for an investor i.d. to be purchased and sold through the same broker.
Some other topics of interest discussed by members of the QFII approval team (which includes people from CSRC, SAFE and the stock exchange) includes increasing the aggregate QFII quota (currently at USD 10 billion) to a certain percentage of the total market cap, possibly 10%, which would be similar to other markets in the region. The anticipated effective date is March 2007 however, according to SAFE, increasing the quota will depend on the “investment appetite” of QFIIs. There are currently nine approved QFIIs waiting for investment quota (as of November 15th), more than ten waiting for quota increases and at least ten applications with CSRC, with 1.355 billion in quota remaining to be allocated. There seems to be an appetite.
Proposals for which we are awaiting approval include; a removal of first remittance/minimum remittance requirements; a reduction in the lock-up period to three months for fund management, insurance companies, pension/charity funds and one year for securities companies and commercial banks; removal of requirements on the amount and frequency of repatriation allowed; and an increase in application time to SAFE for principal and profit repatriations from 5 days to 20 days in advance. It is also anticipated that cash will be allowed to move freely between the various QFII sub accounts.
FT Prudential continues to follow this market closely and will keep clients informed of changes effecting foreign investors. We will continue to visit this market and hope to provide the most up-to-date information.
This information has been compiled from various sources considered to be reliable, is provided for informational purposes only, and is not intended to purport any recommendation or advice. FT Prudential cannot be held responsible for any inaccuracies or omissions or for any action taken or not taken as a result of this information
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