Qualified foreign institutional investors (QFIIs) are keen on investing in China's stock market despite its bearish performance.

Hong Kong and Shanghai Banking Corporation Ltd (HSBC), for example, secured approval from the State Administration of Foreign Exchange (SAFE) over the weekend for another US$50 million investment quota, raising the total to US$100 million.

"We have an optimistic view of China's A-share market," an HSBC spokeswoman said.

The additional quota is based on the actual investment demand of the company, which pursues diversity in its portfolio that combines stocks, bonds and mutual funds, she said.

UBS Limited, the securities investment arm of UBS Warburg, has almost used up its US$300 million quota and has applied for it to be raised to US$500 million, according to Nicole Yuen, head of China equities at UBS. It was the first foreign institution to get a QFII license in China and made its maiden investment in July.

Market sources said that the company had recently spent about US$50 million to buy A shares, such as Baosteel and Shandong Gold, both of which reported good third-quarter results.

Yuen said the company did use the temporary market slump as an opportunity to build up its position, especially since A-share prices had become much cheaper than before and good stocks were available.

She said the investment prerequisite was that the targeted listed companies have sound performance and good management. UBS will continue investment even if there is a downward trend in the stock market, she added.

China has approved nine foreign institutions as QFIIs, which means they can invest in A shares, bonds, mutual funds and other products approved by the Chinese authorities. They have to open special Renminbi accounts at designated custodian banks and cooperate with local securities companies to facilitate the investments.

And there are still five to six foreign companies waiting to get the QFII license, according to sources with SAFE, which has already granted more than US$1 billion of investment quota.

SAFE officials have pledged to further improve the QFII scheme by adjusting the investment quota and foreign exchange controls according to changes in the capital market.

For domestic banks, the entry of foreign institutional investors heralds good business opportunities as custodian banks, said Zhang Enzhao, president of China Construction Bank.

While the foreign banks have the advantage of their expertise and overseas customer resources, Chinese banks are more familiar with the local laws and regulations and have much bigger local networks.

(China Daily November 5, 2003)