Regulators guarding China's local stock market are putting out the welcome mat for big foreign institutional investors, amid signs that a growing number of those investors could move to take advantage of the open door.
On Dec. 14, China's State Administration of Foreign Exchange scrapped a $1 billion ceiling on investments in local capital markets by “institutional investors such as sovereign wealth funds, central banks and monetary authorities,” according to an announcement on the SAFE's website.
Money managers and institutional sales executives in the region said it is their understanding the lifting of the quota ceiling will extend to other bulge-bracket investors, such as the $36 billion Bill & Melinda Gates Foundation, with a $300 million QFII quota, as well as large pension and endowment funds.
Representatives from the SAFE and the China Securities Regulatory Commission — keeper of the “qualified foreign institutional investor” system launched a decade ago to cautiously open local capital markets — couldn't immediately be reached for comment.
The lifting of the QFII quota ceiling is just the latest in a spate of moves this year easing barriers to entry for overseas investors.
Among other changes, the minimum assets under management needed by a money manager to apply for a QFII license was cut to $500 million from $5 billion, while the minimum track record required was dropped to two years from five years. Amid continued streamlining, the time required to get a QFII license from the CSRC has fallen to six months or less from well over a year, while the time required to subsequently get a specific quota from the SAFE has narrowed to one or two months from six.
If liberalization has been widespread, there has been a clear tilt in favor of foreign investors deemed to be heavyweight sources of patient capital, market participants say.
There's been a quantum leap this year in the efforts of China's regulators to attract big institutional investors, including sovereign wealth funds, central banks and pension funds, noted Charles Salvador, vice president of QFII, equity-global institutional sales, with Bank of China International in Shanghai.
Almost 70 QFII licenses have been issued in 2012, compared with 135 in the first nine years of the program. A $1 billion quota for sovereign wealth fund Qatar Holding LLC is among the more recent allotments, Mr. Salvador said.
The lifting of quota ceilings for large foreign pension funds, sovereign wealth funds, central banks and insurance companies is making QFII a two-tiered program, with a growing focus on asset owners as sources of “sticky assets,” as opposed to money management firms or investment banks, said Francois Guilloux, director, regional sales, with Z-Ben Advisors Co. Ltd., a Shanghai-based consultant.
Money management veterans in the region say that regulatory tilt reflects a belief that foreign institutions, focused on long-term returns, can add ballast to a local market that remains dominated by momentum players.
Regulators seem intent on providing further access to investors such as SWFs and central banks, which have remained consistently invested through market cycles, while keeping shorter-term investors, such as investment banks and hedge funds, at manageable levels, noted one local asset management executive, who declined to be named.
Some observers note that the ranks of big foreign investors among China's QFII license holders are still relatively thin, and dominated by Asian players. These would include Singapore's Government Investment Corp. Pte. Ltd.; Temasek Fullerton Alpha Investments Pte., an investment vehicle of Temasek Holdings, the Singapore government's investment arm for the Asian region; and the Hong Kong Monetary Authority, with quotas of $1 billion each.
Other large regional investors include central banks such as Bank Negara Malaysia, with a quota of $400 million, and the Bank of Thailand and the Bank of Korea, with $300 million each.
Big investors outside of Asia include Norges Bank, with a $1 billion quota, and the Abu Dhabi Investment Authority, with $500 million.
A number of sophisticated foreign investors — including the endowments for Harvard, Yale, Stanford, Princeton and Columbia universities — have smaller quotas of between $50 million and $200 million.
If the ranks of institutional investors among QFII license holders are dwarfed by the combined number of money management firms and investment banks, Mr. Guilloux predicts regulatory moves favoring asset owners are likely to be met by growing demand on the part of those foreign investors.
