China opens door further to foreign stock investors

Foreign investors on the Shanghai stock exchange will be allowed to invest in more products and can invest up to 30% in a single company, up from 20% earlier

China has relaxed rules to allow more foreign participation in its main stock market, in the latest step towards liberalising the financial system in the world's second-largest economy.

From Thursday, foreign investors on the Shanghai stock exchange will be allowed to invest in more products and can invest up to 30 per cent in a single company, up from 20 per cent previously.

The move comes just days after the People's Bank of China, the central bank, doubled the daily trading band of its currency, and after it earlier this month provided an explicit timeframe for the liberalisation of the country's deposit rates.

The country's stock markets showed muted reaction to the latest change on Thursday but analysts said it highlighted the overall direction of the reforms.

"We're at the point where developments of this kind represent important forward steps," said Tom Gatley, a senior analyst at GaveKal Dragonomics in Beijing.

With immediate effect, the exchange raised the shareholding limit for Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) in a single company to 30 per cent from 20 per cent, according to new rules by the exchange published on its website late on Wednesday.

The QFII and RQFII schemes are the main channels of foreign investments in China's stock markets. As of end-February, China had issued total quotas of $52.3 billion under the QFII program and 180.4 billion yuan ($29 billion) under the RQFII program, which allows investments using offshore yuan.

The Shanghai bourse also said foreign investors would now be permitted to trade asset-backed securities, when-issued debt and bonds issued by Chinese policy banks for the first time. They can now also participate in the preferred share programme, which is expected to be launched soon, it said.

"The move comes at a time when China's stock market is quite weak and regulators hope to attract more foreign investment," said Zheng Weigang, a senior trader at Shanghai Securities.

"However, compared with China's large capitalised stock market, the overall amount of QFII and RQFII investment accounts for only a limited portion, so the impact of the new rules may be limited.

"Besides, because of lacklustre growth of China's economy in recent quarters, foreigners' interest in China's stock market is also not that strong, and that will also limit the impact of the new rules."

The CSI300 index of top Chinese companies on the Shanghai and Shenzhen stock exchanges .CSI300 was up 0.3 percent on Thursday while the Shanghai Composite Index .SSEC was up 0.4 percent.

YUAN, INTEREST RATE REFORM
On Saturday, the PBOC widened the daily trading range for the yuan, which analysts said suggested regulators believe the economy is stable enough to handle more promised reforms going forward.

The PBOC's governor said earlier in the month that the country's deposit rates are likely to be liberalized in one to two years - the most explicit timeframe to date for what would be the final step in freeing up banks to set their own interest rates.

On capital market reforms, China has been widening channels for investors buying mainland stocks, bonds and money market instruments.

Last year, China doubled the overall quota of the QFII scheme to $150 billion and said it would expand the RQFII pilot program to London, Singapore, Taiwan and other unnamed locations. The RQFII scheme is currently available through designated institutions in Hong Kong.

However, foreign interest in Chinese equities has been tempered in recent years by concerns that onshore markets are driven primarily by speculation on policy direction and stimulus spending instead of business and economic fundamentals.

Investors also cite corporate governance issues as a problem. Analysts say a lack of clarity about how Beijing will tax profits from QFII investments has also restrained more conservative investors.

China is aiming to transform its commercial centre Shanghai into a global financial hub on par with the likes of London and Singapore by 2020 but analysts say there is still a long way to go.

"If you want people to take you seriously as a financial centre, then you have to allow non-Chinese people to participate in the whole range of capital instruments," Gatley said.

"There are other things substantially more important for making Shanghai a credible financial hub, notably capital account convertibility. That's the major one." ($1 = 6.1965 Chinese Yuan)