China Revises Rules to Offer Foreign Investors More Leeway
China’s stock exchange regulators published revised rules Friday to give foreign investors more leeway to adjust their investments in the country’s capital market as China continues expanding investment access to foreigners.
The new rules are part of guidelines released by the Shenzhen and Shanghai stock exchanges regarding the country’s two major programs offering foreign investors access to Chinese financial assets — the Qualified Foreign Institutional Investor (QFII) plan and its yuan-denominated sibling, the Renminbi Qualified Foreign Institutional Investor (RQFII) system.
Under the guidelines, exchange regulators will publish warnings when total foreign shareholding in a single domestically listed company reaches 24%, rather than at 26% as previously. China caps overall foreign ownership in a single listed company at 30% while limiting each foreign shareholder to no more than 10% of a listed business.
The change will give foreign investors more time to adjust their portfolios to avoid trading interruptions. It will take effect Nov. 1, the same day that qualified foreign investors will be allowed access to expanded investment options through the QFII and RQFII programs under a new policy issued in September.
Previously, stock exchange operators sent warnings to investors when foreign shareholding in a company through QFII, RQFII and stock connect programs reached 26%. Exchanges would then automatically suspend all new buying orders when foreign holdings reached 28%. Transactions involving new orders would resume after foreign shareholdings dropped back below 26%.
With growing trading frequency, the warning has become increasingly inadequate, according to market participants. The policy change was made in response to requests from foreign investors for timelier updates on listed companies’ shareholding structures so they could have more time to adjust trading strategies, an official at the Shanghai exchange said.
“When it reaches 26%, there is only one step away to the suspension,” said an executive at a U.S. asset management company in China. “There was not enough time to prepare.”
The new guidelines also clarify that if foreign ownership in a company exceeds 30% but is caused by changes in the company, such as a reduction of registered capital, foreign investors will not be forced to lower their shareholdings. Instead, they will be barred from buying more of the company until the overall foreign ownership drops below the cap.
China launched the QFII program in 2002 and the RQFII program in 2011, allowing foreign institutional investors to trade in the country’s stock and bond markets. But the advantages of the two programs have been diminishing since the launch of the Shanghai-Hong Kong Stock Connect system in 2014 and the Shenzhen-Hong Kong Stock Connect and Bond Connect programs in 2016, which gave foreign investors more options to directly invest in the mainland’s financial markets.
Regulators have made several revamps to QFII and RQFII to attract investors. On Sept. 25, China’s central bank, national securities regulator and state foreign exchange administrator said in a policy document that QFII and RQFII investors would be offered more investment options starting Nov. 1, including securities traded on Beijing's New Third Board, private investment funds, bond repurchase agreements and margin trading. In addition, foreign institutions will have access to derivatives, including financial futures, commodity futures and options through the programs.
Contact reporter Han Wei (email@example.com) and editor Bob Simison (Bobsimison@caixin.com).
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