According to the latest update on March 26 on the Qualified Foreign Institutional Investor (QFII) quota awards released by China’s foreign exchange regulator, the State Administration of Foreign Exchange (SAFE), Fidelity Investments Management (Hong Kong) was granted a combined quota of US$1.2 billion to invest in the Chinese financial market, which makes it the first asset management company under the program to break the US$1 billion quota cap.
The new measure adds to SAFE’s December 2012 relaxation of the US$1 billion QFII quota restriction for sovereign wealth funds, central banks and currency administration authorities. The data released also indicates that the combined quotas granted since the launch of the program in 2002 have reached US$72.2 billion, approaching half of the total US$150 billion program quota.
This move itself may only have a moderate impact on foreign fund investments, since most of the quotas granted have not been fully used. However, it can be seen as a signal of a further liberalization of China’s capital market. In fact, Chinese officials have indicated that upcoming reforms on QFII and its renminbi-based equivalent (RQFII)* may replace the current approval scheme with a registration system and allow foreign license holders to invest in a broader range of products traded in the Chinese interbank market. These signals have convinced Z-Ben Advisors, a Shanghai-based consulting agency, to project that “all remaining QFII quota … will be fully issued prior to the end of 2015.”
These expected reforms on foreign fund investments are likely to alleviate depreciation pressures on the renminbi and contribute to a further relaxation of restrictions on capital investment flows. As China has been lobbying for the renminbi to be included in the Special Drawing Rights (SDR) basket of currencies, and with another round of the IMF’s five-year SDR review coming later this year, making the renminbi “basically convertible under the capital account” could lend substantial support to the movement.
*Zhou Xiaochuan, China’s central bank governor, said on March 22 that a series of policies and pilot programs are to be launched in 2015 to reform the QFII scheme and to make the yuan “basically convertible.”