China’s Capital Markets

China’s Capital Markets

Challenges from WTO Membership

Advances in Chinese Economic Studies series

Edited by Kam C. Chan, Hung-Gay Fung and Qingfeng ‘Wilson’ Liu

China’s economy has been growing rapidly since the late 1970s and is expected to maintain this momentum in the foreseeable future. Coupled with the biggest population in the world, there is tremendous growth potential for China’s capital markets and financial services industry, both vital to the continued development of the economy. The contributors present research on all facets of China’s markets including: stock and bond markets; futures and over-the-counter markets; regulatory issues; and the development and roles of financial institutions such as brokerage firms, banks and insurance companies. Also addressed are the recent performance of equity markets, the emergence of small and medium enterprises, and the state banks’ bids to be listed in overseas stock exchanges. Taken together, the book sheds a welcome light on China’s overall economic growth.

Chapter 9: China’s Qualified Foreign Institutional Investor and Qualified Domestic Institutional Investor Programs

Hung-gay Fung and Qingfeng ‘Wilson’ Liu

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation

Extract

9. China’s Qualified Foreign Institutional Investor and Qualified Domestic Institutional Investor programs Hung-gay Fung and Qingfeng ‘Wilson’ Liu INTRODUCTION China’s Qualified Foreign Institutional Investor (QFII) program is a transitional arrangement aimed to introduce foreign capital to domestic financial markets at a measured and controlled pace. The QFII approach has been commonly used in emerging markets, such as Korea and Taiwan, to gradually open up their domestic financial markets to foreign institutional investors that have been ‘qualified’ by the local government. Historically, the QFII program was first initiated in Taiwan in 1990 and soon spread to other emerging financial markets such as South Korea, Brazil and India. The results varied by the country, but overall the program proved to be quite successful in opening up domestic securities markets to foreign capital investment in a timely fashion. In the late 1990s, some financial practitioners and researchers recommended that China adopted the program to grant QFIIs limited access to the domestic A-share market, which had initially been designed for domestic investors only. The number of QFIIs approved in China increased rapidly in 2004 and 2005. They are from all across the globe. The approval process through which a foreign financial institution becomes a QFII takes time as the future trading transactions have to go through a custodian bank designated by the Chinese government. As of the end of 2005, there were 34 QFIIs, most of whom had invested in common stocks. A few had investments in convertible bonds and...

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