China eases markets before US meetings

BEIJING - China has underscored its intention to open up the country's financial markets by tripling the investment quota of qualified foreign institutional investors (QFII) from US$10 billion to $30 billion.

The announcement from the State Administration of Foreign Exchange (SAFE) came ahead of the 18th US-China Joint Commission on Commerce and Trade meeting on Tuesday and the third Sino-US Strategic Economic Dialogue, which opens on Wednesday. The Chinese government can expect to face further calls that it open up its markets more to overseas investors and take further action, such as letting it currency appreciate at a faster pace, to limit growth in its trade surplus. US Treasury Secretary Henry Paulson, Beijing for the talks, has argued strongly for faster appreciation of the yuan.

The QFII move also came out before the release on Tuesday of China's latest trade and inflation figures, which showed price increases accelerating to the quickest in 11 years and the trade surplus growing, adding further to domestic pressure on government to raise interest rates and let the currency appreciate faster.

Consumer prices rose 6.9% in November from a year earlier, faster then the 6.5% gain in country's main inflation measure in October, the statistics bureau said. The trade surplus climbed 14.7% to $26.3 billion in November from a year earlier, the customs bureau said today. The 11-month trade surplus with the US rose to $149.2 billion.

This was the second expansion of the QFII program, which allows foreign investors to trade in the yuan-denominated A shares while the Chinese currency remains not fully convertible. The country launched the QFII program in 2002 with a quota ceiling of $4 billion on a trial basis. The previous expansion, in 2005, was $6 billion. However, no foreign institutional investors have acquired any new quotas since February, when the then $10 billion quota was running low.

Shang Fulin, chairman of the China Securities Regulatory Commission, told reporters in October that raising the QFII quota was a common understanding reached at the second Sino-US Strategic Economic Dialogue. On the other hand, ahead of the Strategic Economic Dialogue, China has warned of "serious harm" to the bilateral economic and trade ties, if some legislative bills, now before the US Congress, are passed.

Finance Minister Xie Xuren said that it was "worrying" to see the rising trend of trade protectionism in the US. He was referring to more than 50 legislative bills concerning US economic and trade ties with China proposed by some US Congress members since the beginning of the year.

The SAFE said it would "decide the tempo" of quota issues in line with China's international payments and the development of the domestic stock market. "Eligible overseas medium- and long-term investment will be encouraged to invest in China's capital market," it said.

Reviewing the performance of QFII funds over the past five years, the SAFE said that the system had facilitated a transformation in Chinese investors' sophistication, improved risk management, strengthened the global clout of Chinese capital markets and helped optimize corporate governance. The number of QFIIs, described by the SAFE as "significant institutional investors," now totals 49. Their aggregate market capitalization was nearly 200 billion yuan (about $27.02 billion).

Industry analysts said the government had previously been reluctant to raise the QFII quota for fear of sparking currency appreciation and concern that the domestic stock markets were near bubble territory.

Separately from the SAFE announcement, Liu Mingkang, chairman of the China Banking Regulatory Commission, played down fears of the economy overheating in comments made at an annual conference sponsored by Caijing Magazine in Beijing Monday.

"The benchmark Shanghai index has more than tripled from 2003 to this November, which is still small compared with other BRIC [Brazil, Russia, India, China] nations. Russian stocks rose nearly 631%, Brazilian stocks 576% and Indian stocks 596%," he said.

To promote steady development of the financial markets, the SAFE also said that it would expand channels for local residents to invest abroad and raise the investment quota for qualified domestic institutional investors (QDII). The QDII program is designed to allow Chinese investors to trading in overseas shares as the yuan remains not fully convertible.

"We support more eligible local financial institutions being able to provide more diversified products for domestic investors, enhance their risk management and establish new advantages in global competition," said the SAFE in a statement.

As of end-September, all QDIIs - including banks, funds, insurers and securities dealers - had acquired investment quotas of $42.17 billion, with an actual outflow of $10.86 billion.

The benchmark yuan-US dollar exchange rate hit a new high of 7.3872 on November 27, for a cumulative appreciation of nearly 11% since China discontinued the peg to the greenback in July 2005.

Zhou Xiaochuan, governor of the People's Bank of China, or the central bank, said on November 18 that if necessary the nation would consider widening the yuan's floating band.

(Asia Pulse/Xinhua)