China lifts $1bn ceiling on select list of foreign investors to shore up equities slump

China has scrapped a ceiling on investments by overseas sovereign wealth funds (SWFs) and central banks in its capital markets, as government attempts to encourage long-term foreign ownership and shore up slumping equities.

SWFs, central banks, and monetary authorities can now exceed the $1bn (€759m) limit that still applies to other qualified foreign institutional investors, according to revised regulations posted on the State Administration of Foreign Exchange’s website on Friday.

On Friday, the Shanghai Composite Index jumped the most since Oct 2009 after the head of the Hong Kong Monetary Authority said the previous day that China may relax or abolish a rule that requires renminbi-qualified foreign institutional investors (QFII) to keep most of their funds in bonds. Since Guo Shuqing took over as chairman last year, the China Securities Regulatory Commission has cut trading fees, pushed companies to increase dividends, and allowed trust companies to buy equities.

Introducing more long-term funds from abroad will help improve market confidence, promote stable growth in capital markets, and provide “robust” investment returns to domestic investors, the regulator said in May, a month after Beijing more than doubled the quota for QFIIs to $80bn from $30bn.

The benchmark Shanghai Composite has lost 2.2% this year, while the MSCI China Index of mostly Hong Kong-traded shares, open to overseas investors, has gained 18% as US bond purchases spurred foreign funds to pour money into emerging markets.

QFIIs can repatriate their principal and investment returns after a lock-up period ends, though the monthly net remittances cannot exceed 20% of their total onshore assets as of the previous year, according to the Dec 14 rules.

Open-ended China funds can remit funds on a weekly basis under the new regulation, compared with monthly in the previous version announced in 2009.

The Hong Kong Monetary Authority, Norges Bank, Government of Singapore Investment Corp, and Temasek Holdings Pte’s Fullerton Fund Management Co have all reached the $1bn limit as of Nov 30, with QFIIs’ approved quotas totalling $36.04bn, according to Safe, the currency regulator.

Foreign investors can only invest in capital markets through QFIIs.