China's foreign exchange reserve agency has issued a new rule to discourage speculations in A-share markets.

By staff reporter Wu Ying

(BOCVIP.COM) Restrictions on the transfer of investment quotas under the Qualified Foreign Institutional Investor program are likely to discourage short-term investment in China's A-share market, fund managers and analysts said.

The State Administration of Foreign Exchange released new rules on Oct. 10 raising the upper limit on quotas for a single investor under the QFII program to US$1 billion from US$800 million, to "encourage medium- and long-term foreign investment in China securities."

Investors have also been prohibited from transferring or selling their quotas to other institutions, according to the new rules.

At present, most overseas hedge funds invest in the A-share market with quotas leased from QFII program members, fund managers said.

An A-share investment manager with an overseas fund told Caijing that with the release of the new rules, some foreign investors are likely to shift their focus to A-share index products sold on the international market.

Other investors with longer-term commitments will consider applying for QFII license from Chinese government, "though it would be a lengthy and arduous process," said the manager.

Shanghai-based consultancy Z-Ben Advisors Ltd. said in a recent report that the new SAFE rules are aimed at encouraging long-term investment while curbing speculation in the A-share market.

Z-Ben analyst Hu Miao said in the report that SAFE's previous rules allowed the transfer or sale of QFII quotas to some extent, facilitating the flow of speculative funds in and out of China.

SAFE's new rules carry the threat of reduced or cancelled quotas for QFII participants if they are involved in "illegal activities in using their foreign exchange by transfer or sale of investment quotas."

According to Z-Ben's estimates, foreign brokerage investors under the QFII program have won quotas totaling US$ 9 billion to 10 billion to date, of which 1.5 to 3 billion may have been leased to unapproved investors.

China launched the QFII program, the main route for foreigners to buy Chinese securities, in 2003.

At the end of August, SAFE had granted total quotas of US$15.3 billion to 76 QFIIs, which had remitted US$13.8 billion into China for investment.

1 yuan = 14 U.S. cents

Full article in Chinese: http://www.bocvip.com/2009-10-15/110283223.html