Challenges from WTO Membership
Advances in Chinese Economic Studies series
Edited by Kam C. Chan, Hung-Gay Fung and Qingfeng ‘Wilson’ Liu
Chapter 9: China’s Qualified Foreign Institutional Investor and Qualified Domestic Institutional Investor Programs
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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