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China has slapped new restrictions on a landmark reform to usher foreign investors into domestic stock markets, hoping to avoid the hot money flows that wreaked havoc in Asia during the 1997-98 financial crisis.
Each foreign institutional investor must invest between US$50mil and US$800mil in A shares when the market is opened to them for the first time next week, according to China's foreign exchange regulator.
The new curbs add to earlier rules aimed at minimizing risks of capital flight and shocks to a rigid forex regime - for example, most investors have to keep money in China for at least one year and closed-end funds for three years.
"An important lesson from the Asian financial crisis is we should avoid short-term capital inflows from foreign securities investors and focus on introducing medium- and long-term capital," a spokesman was quoted as saying by state newspapers.
"We have learned from the experience of Taiwan, India and South Korea to encourage medium- and long-term investors and to control the capital flow gateway," the State Administration of Foreign Exchange spokesman said.
But some fund managers said that while the US$50mil floor was not unreasonable, it was fairly strict. "The ceiling is not a big problem, but US$50mil is a little high," said Tony Yam, research manager at Shanghai Orient-Sun International Investment Management Co Ltd.
Analysts said China faced the dilemma of having to develop its speculative and illiquid stock markets by allowing in more stable overseas capital while maintaining an iron grip on foreign exchange - a pillar of its macroeconomic policy.
The government's solution is to allow select overseas investment funds, pension funds, insurers, banks and brokerages into A shares under a Qualified Foreign Institutional Investor scheme that will start accepting applications tomorrow.
Foreign fund managers, lured by China's steady economic growth of about 8% this year, have welcomed the chance to tap Asia's second largest share market, capitalized at around US$500bil, for the first time.
But they said a big rush of money was unlikely as China stocks were overvalued, corporate governance was weak and regulators had imposed overly strict investment criteria which only the top global institutional investors were likely to be able to meet.
(China Daily November 30, 2002)
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