AN INTERVIEW WITH ZHENG YANG ,VICE DIRECTOR,CAPITAL ACCOUNT DEPARTMENT ,THE SAFE

---QFII In China: Status quo and development

 

 

QFII (Qualified Foreign institutional Investors) refers to the system under which qualified foreign institutional investors can invest in the host country's stock market. The system allows foreign institutional investors (approved by departments of the host country) to remit foreign exchange within an approved quota, and change it into local currencies before investing in the local capital market through special accounts.

 

Adoption of QFII is conducive for the host country to attract new funds, develop the stock market, nurture institutional investors, introduce rational investment concepts, promote regulated and internationalized markets, and accumulate experience of capital market liberalization. On the other hand, QFII may cause frequent cross-border fund flows, which may affect the exchange rate stability and balance of international payments, and also may impact the effectiveness of monetary policies.

 

Currently, China's macro economy has laid a solid foundation for the development of the QFII system, and the increasingly regulated and mature stock market has provided favorable market conditions for developing QFII. Additionally, successful experiences abroad also can serve as a reference for China.

 

The design of QFII in China has taken into consideration both China's specific conditions as well as experiences in other countries and regions. The QFII in China is characterized as having strict requirements on the qualifications for QFII, as well as having stringent restrictions on QFII's fund exchange that aims to encourage long term investment in the domestic capital market.

 

In November 2002, QFII was officially launched in China with the publication of Interim Measures on Management of Domestic Securities Investments of Qualified Foreign Institutional Investors. After that, a series of rules on operational details for QFII were set up by various administrative departments, including the SAFE, the stock exchanges, as well as China Securities Depository & Clearing Co. Ltd.

 

Since China's implementation of the QFII system, foreign investment institutions and domestic commercial banks have been busy. As of October 20, ten domestic commercial banks have been approved to act as custodian banks for QFII, and nine foreign institutions have been approved as QFII.

 

QFII will not become a channel for hot money. Fund flowing inward via QFII must go through a usage-lock period of at least one year, making QFII more difficult than other methods as a pathway for hot money inflows. The inflow of hot money and appreciation pressures on the RMB have urged the SAFE to take measures to maintain the balance of payments, ease the RMB appreciation pressure, and control the excess inflow of hot money. The recent inspection by the SAFE of the forex purchasing and sales by designated forex banks is a signal of its determination to scrutinize all cross-border flows of hot money.

 

At present, the QFII system is piloted smoothly in China, with relevant rules and regulations being improved and the government accumulating experience in supervision. To promote a steady growth of the QFII system, the authorities should adjust moderately its approach to management in light of the performance of the stock market, the situation of international payments, and the level of capital market liberalization.