China Meets Foreign Investors' Demands With Latest Rule Changes

(Bloomberg) -- China’s authorities have given international investors an early Spring Festival gift: ready access to almost all areas of the country’s capital markets.

Proposed changes announced late Thursday as part of a slew of new regulations include letting offshore funds trade more types of futures and options. Just days before the biggest holiday in the Chinese calendar, regulators also had something for domestic investors, including scrapping an automatic margin call threshold, allowing more types of collateral for certain loans and lowering capital requirements for riskier assets.

The measures targeting overseas firms will greatly expand the scope of the Qualified Foreign Institutional Investor program, one of the key channels into China, highlighting the authorities’ determination to open up their financial system and meet demands from international institutions for broader access. The moves will give foreigners the same range of investment options as local players, said Yang Hai, an analyst at Kaiyuan Securities Co.

“Institutions looking to hedge and even short-sell Chinese stocks are likely to enter the market in future,” as a result of the changes, said Yang. “I think it has something to do with the China-U.S. trade negotiations, but it’s also about the financial opening promise.”

Here’s a look what the QFII changes will mean:

Investments available under existing rules

Additional investments under proposed changes

Stocks and bonds traded on exchangesFinancial futures
Fixed-income products traded in the domestic interbank bond marketMargin trading and securities lending 
Securities fundsOptions
Stock-index futuresPrivate investment funds
NEEQ-listed stocks
Bond repurchase agreements
Commodity futures

Authorities have been stressing that China will open up its financial sector for more than a year.

Thursday’s changes relating to offshore investors were focused on QFII, a quota system that, along with trading links via Hong Kong, is the main way for foreigners to participate in China’s capital markets. The government doubled the QFII quota to $300 billion on Jan. 14, the first expansion since July 2013. Authorities will also merge QFII with the so-called RQFII system, used by investors with offshore renminbi accounts.

“Existing qualified investor schemes are no longer adapted to the new market environment in terms of market entry requirements, investment operation, and continuous supervision,” the China Securities Regulatory Commission said in a statement.

The announcement came as senior Chinese officials are in Washington to meet with U.S. counterparts on ways to resolve the trade war between the countries. The two sides made important progress during talks that were candid, specific, and fruitful, according to a statement published by China’s Xinhua News Agency on Friday.

Overhauling QFII signals to the U.S. that China is opening its domestic market to foreign players, and also indicates that the country’s inclusion into global indexes will happen faster than expected, said Jinny Yan, chief China economist at ICBC Standard Bank Plc.

“These simplification measures are targeted more at those who are still mystified by the complexity of the different access channels,” said Yan.

Changes for local investors include:

  • Exchanges are drafting revisions to scrap the requirement that a margin call must be made if the stock’s value falls below 130 percent of the loan value
  • More types of collateral will be accepted in margin trading and short selling
  • Authorities plan to encourage securities companies to invest in stocks and exchange-traded funds by lowering capital requirement for riskier assets

Issues around access to China’s markets have been raised by global index compilers, even as they seek to add the country’s securities to their gauges this year. Overseas funds will buy $200 billion of bonds and stocks in 2019, after purchasing $120 billion last year, Citigroup Inc. strategists led by Sun Lu wrote in a note dated Thursday.

Foreign investors will also be able to trade on China’s over-the-counter stock venue, the National Equities Exchange and Quotations platform, as well as engage in margin trading and short selling transactions, the CSRC said. If the proposals are approved, QFII will allow them to invest in domestic private funds.

“Our clients are very excited about the opening up to private equity through the programs,” said Thomas Dongming Fang, head of China equities at UBS Group AG. “Many foreign PE firms have launched products in China, but the brands are new and it’s hard for them to find local investors. The new channel will give a boost to their fundraising.”

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