Removal of quota caps to boost capital inflows

China's decision to lift quota restrictions on foreign investors in domestic markets will attract more capital inflows and help offset the economic downside risks from the novel coronavirus epidemic, experts said on Friday.

On Thursday, China announced it will scrap the quotas for the dollar-denominated qualified foreign institutional investor (QFII) scheme and its yuan-denominated sibling, RQFII, in a bid to further facilitate foreign institutional investors' participation in the country's financial market.

According to the experts, the Chinese economy has been gradually returning to normalcy, even as other countries are enacting coronavirus-containment measures to limit the infection and global financial markets are under tension. Overseas demand for financial assets in China has increased since the pandemic, they said.

The quota abolition policy will come into effect on June 6. After that, qualified foreign institutional investors can inject funds without any investment curbs in the domestic bond and stock markets.

"The Chinese government has recently announced its intent to improve the market-based mechanism for production. This has sent out an important signal that China will persist in deepening market-oriented reforms, expanding high-level opening up, and tearing down institutional barriers," said Zhou Xiaochuan, vice-chairman of the Boao Forum for Asia and former governor of the People's Bank of China, at an online conference held by the forum on Friday.

The move to lift the investment caps is the latest in a series of policies designed to gradually open up the country's financial sector. According to a statement issued by the PBOC and the State Administration of Foreign Exchange, foreign investors under the QFII scheme will be allowed to make inward remittances in the currency of their choice. China will also simplify outward remittance procedures for QFIIs' securities investment gains and lift other restrictions, it said.

Lou Feipeng, a senior economist at the Postal Savings Bank of China, told China Daily that the measure will significantly expand China's financial opening up.

The benchmark CSI 300 index of Shanghai and Shenzhen listed stocks rose by 0.99 percent on Friday. It rose by 1.3 percent this week, following a 3.04 percent jump last week. The benchmark Shanghai Composite Index added 0.83 percent to 2895.34 points.

PBOC Governor Yi Gang said in a recent article that China needs to accelerate financial opening up as it can encourage direct financing through bond and stock markets while reducing the reliance on bond lending. It will also help optimize the capital market structure and spur China's efforts to improve financing efficiency and curb debt burden.

The two major inbound investment schemes, introduced in 2002 and 2011 respectively, were seen as the most significant policies during China's opening up of its domestic capital markets. More than 400 institutional investors from 31 countries and regions have injected funds into the world's second-largest economy through the two schemes.

"The abolishment of the investment quota restrictions represents another line of progress for the long-term opening up of China's financial markets and will enable investors to optimize the ongoing opportunities to invest in the Chinese market," said Jameel Ahmad, global head of Currency Strategy and Market Research at FXTM, a global forex trading platform.

"This is something that investors will reflect on positively for their long-term portfolio options," said Ahmad.