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By Jason Simpkins
Associate Editor
China announced on Sunday that it would triple the amount of money foreign financial institutions can collectively invest in its domestic stock market. The quota, which previously stood at $10 billion, will now be raised to $30 billion. China originally limited qualified foreign institutional investment to $4 billion when it launched the program in 2002.
“China has underscored its intention to open up the country's financial markets,” state-run Xinhua said in describing the decision.
The announcement, posted on the website of the State Administration of Foreign Exchange, kicks off a week of high-level economic dialogue between China and the United States. The expanded quota was agreed to in principle during the last round of talks between the two nations in May. However, Chinese authorities delayed its implementation because of an influx of foreign capital.
The benchmark Shanghai index has more than tripled since 2003. Companies listed on the exchange were trading at 40 times their forward earnings when the index hit a record high of 6092.06 in October. Since then, the index has experienced a correction, dropping 15% in the past month.
Three “Strategic Economic Dialogues” have been held between the United States and China so far. In each of those meetings, the U.S. delegation made the value of the yuan its primary focus. The United States and others have repeatedly accused Beijing of keeping its currency artificially low to boost exports out of the country.
By allowing more foreign investment in Chinese yuan-denominated stocks, however, demand for the Chinese currency will rise, adding upward pressure on the exchange rate.
The benchmark yuan-U.S. dollar exchange rate hit a new high of 7.3872 on Nov. 27, for a cumulative appreciation of nearly 11% since China discontinued the peg to the greenback in July 2005.
So far, a total of 49 institutional investors have secured qualified foreign institutional investors (QFII) licenses to the Chinese capital market. According to the foreign exchange commission, foreign investors currently hold $27 billion in assets.
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