The Provisions on Issues Relevant to the Implementation of the 〈Measures for the Administration of Securities Investments in China by Qualified Foreign Institutional Investors〉关于实施〈合格境外机构投资者境内证券投资管理办法〉有关问题的规定 from the China Securities and Regulatory Commission was issued on July 27 and became effective the same day.
The Provisions strengthens supervision and aims to attract more foreign long-term institutional money into the Chinese capital markets. The CSRC is looking to accelerate cross-border flows and further open up domestic financial markets to foreign investors,” said Hubert Tse, a partner at Chinese law firm Boss & Young in Shanghai who advises qualified foreign institutional investors (QFIIs) in China.
Article 13 of the Provisions allows QFIIs to choose more than one securities dealer. For the first time, each QFII can use three domestically registered securities companies at the Shanghai Stock Exchange and the Shenzhen Stock Exchange to trade securities.
“QFIIs were only allowed to choose one broker, which lacks flexibility if problems or disputes arise with their brokers. The switch from one broker to another is also complicated and costly,” noted Tse.
QFIIs were reluctant to change their brokers unless it was essential. For example, CITI changed their broker to Orient Securities because they were about to form a joint venture with the broker outfit in June 2011.
The Circular allows QFIIs to transfer their funds more easily and trade with brokers that are more reliable, as well as switching between brokers when buying or transferring funds. Competition is also expected between securities dealers, as they no longer have a monopoly over investors.
Article 9 of the Provisions increases investments in listed companies, as QFIIs can now hold up to a 30% stake, up from the previous 20% cap.
“This will encourage foreign investors as they can get more involved and take larger stakes in listed companies. At the same time the local market would gain more liquidity from this increase,” said Tse.
In addition, the CSRC is expanding the channels open to investors. Under Article 8, they are now permitted to invest in the interbank bond market and private placement bonds issued by small and medium-sized enterprises (SMEs).
SMEs have been struggling this year, with difficulty in raising money and launching initial public offerings (IPOs). “Not every SME in China is able to secure bank loans or private equity investments, so private placement would provide them with another channel for much needed fundraising,” commented Tse.
In April this year, the CSRC also raised the quota for QFIIs from $30 billion to $80 billion. The Commission has also increased the speed at which it approves investments and is granting more licences. Combined with the new Provisions, these are all strong signs the country is committed to opening up its capital markets.
A full text translation of the Provisions will be available in the September/October issue of China Law & Practice.
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