Foreign investors are expected to resume their pace of entering China's A-share and bond markets after the issuing of another three qualified foreign institutional investor (QFIIs) licences by the nation's securities watchdog last week.

The newcomers, Merrill Lynch Intl Inc, Hong Kong's Hang Seng Bank Ltd and Japan's Daiwa Securities SMBC, bring the total number of licensed QFIIs in China to 15, among which 11 have so far received investment quotas from the foreign exchange authorities that total US$1.7 billion.

The new licences seem to have melted the ice on QFII approvals, which slowed at the end of last year under concerns of appreciation pressure on the renminbi if more foreign capital continued to flood in through this channel.

The QFII rules, first released at the end of 2002, enable foreign institutions to trade yuan-denominated A shares and bonds via special accounts opened at designated custodian banks.

All QFIIs have to apply for a certain investment quota after acquiring a licence.

The China Securities Regulatory Commission (CSRC) licensed a dozen QFIIs within the seven months to November last year. But it then tightened the reins and no more new licences were issued until last week's breakthrough.

The fact that the foreign companies got their licences within a few days is a sign that QFII approvals are back on track, a CSRC official said.

More foreign institutions, including ABN AMRO of the Netherlands, are still lining up for a licence and more are applying to the State Administration of Foreign Exchange (SAFE) for investment quotas.

But their quotas and final approvals will still be controlled by SAFE, which will take into account the international balance sheet and the influx of money.

However, the pressure on the renminbi to be appreciated has dropped off, given the possibility of an interest rate hike in the United States, which may allow the authorities to increase QFII licensing and quota approvals, say analysts.

On the other hand, China's stock market has undergone a sharp correction over the past week. The introduction of more foreign investors may give it a boost.

To foreign investors, the biggest attractions of the Chinese market are the fast growth of the capital market, the rosy economic outlook and a strong renminbi.

UBS, one of the first foreign companies to get a QFII licence last May, has quickly used up its US$600 million QFII investment quota - the biggest granted by the authorities so far.

"We applied for a new QFII investment quota in February," said Nicole Yuen, executive director and head of China equities at UBS Securities Asia.

She did not reveal the size of the quota the company was chasing, but told China Daily it was "the maximum (QFII) volume the Chinese authorities would allow."

As designated in the provisional regulation on foreign exchange administration for QFII domestic securities investment at the end of 2002, the maximum QFII investment quota for an applicant is capped at US$800 million. The minimum is US$50 million.

UBS got its first US$300 million quota from SAFE in June and the same amount in November.

Rodney Ward, Asia chairman of UBS Investment Bank, said in February that even the present US$800 million investment cap for a QFII may not be enough.

The company had been lobbying the authorities for a larger limit, he said.

UBS is confident about the Chinese market and wants to invest more, especially with the good performance of Chinese stocks this year, Ward said.

CSFB (Hong Kong) Ltd, a unit of Switzerland's Credit Suisse Group, is also trying to increase its QFII investment quota by US$700 million, bank sources said.

It was granted an initial QFII quota of US$50 million in December, but the positive feedback from its clients urged it to put more money into Chinese equities.

However, not all QFII applicants share the same investment style and outlook.

In February, SAFE decided to half the US$100 million quota granted to ING Bank.

The move, as cited by SAFE, was due to insufficient capital remittance by the bank to its QFII account within the required three-month fund injection period after getting a quota approval.

An ING spokeswoman said the reason for the quota cut was due to limited demand from its clients at the time.

Liang Jing, an analyst with Guotai & Jun'an Securities Co, said a mixed response from QFIIs was normal on market entry.

Some QFIIs are still very prudent when it comes to entering the Chinese market, Liang said.

Apart from the opinions of clients and expected returns, the pace also depends on the institutions' familiarity with the local market.

UBS, for example, with heavy input in China equities research, has been more aggressive in buying stocks, while some other foreign institutions choose to buy more treasury and convertible bonds which involve lower risks, Liang said.

The exact returns of QFII investments made so far were not explicit. Though some of the QFIIs admitted that the short-term gains were not satisfactory, they also said they would focus more on the long-term growth of Chinese companies.

The Chinese market is more rational now. The prices of the listed companies are more in compliance with their performance.

And the blue-chip counter has gained more favours, said Dong Chen, an analyst with China Securities.

To the Chinese authorities, however, a lingering concern is the entry of international hot money into the domestic market on speculation of a renminbi appreciation and chances of profit-taking.

So far this year, SAFE has only granted a US$50 million quota to one foreign company, Japan's Nikko Asset Management, though applicants have queued up for their quotas to commence trading.

Standard Chartered, for example, got a licence from CSRC in December but is still awaiting SAFE approval on the quota.

The rise of the trade deficit and changes in the international balance sheet may induce the authorities to loosen control on the capital account, experts said.

But the most direct way to balance the capital flow is to allow more domestic institutions to invest overseas, said Chen Lihua, investment director of Southern Fund Management Co.

"If US$1.7 billion of foreign capital can enter the Chinese market through QFII, then there is no reason not to let domestic institutions to step into overseas capital markets," he said.

China's foreign exchange reserves shot up to US$439.8 billion by the end of the first quarter, a 39 per cent growth year-on-year.

It is necessary to encourage more outbound investment to keep a balance, Chen said.

As a first try, the State Council has allowed the National Social Security Fund to invest in overseas capital markets, though investment preparation is still under way.

Other domestic institutions, including insurers, securities houses and fund managers, have shown a strong interest in the overseas investment experiment, but have not heard of a timetable.

Even without any official arrangement, it is a fact that some domestic capital has flown out through illegal means, said Chen.

(China Daily May 17, 2004)