China signals opportunities for investors Global financial institutions will be allowed to play a more active role in China's equity markets if the new reformist head of the country's securities regulator gets his way. Guo Shuqing, who became chairman of the China Securities Regulatory Commission in October, signalled his intent this week by more than doubling the amount of money that foreign institutions can invest in China's capital markets. The CSRC announced on Tuesday that international fund managers would be allowed to invest a combined total of $80bn in China's capital markets, up from the previous limit of $30bn, in an expansion of the so-called qualified foreign institutional investor (QFII) scheme. While the amounts involved are small - foreign investors own just 1 per cent of the free float in China's equity market - the quota increase shows that China is intent on liberalising its capital account, albeit gradually and on its own terms. "This is what Guo Shuqing has been pushing for for a while as part of his effort to introduce more long-term institutional investors into the equity market," says Howhow Zhang, head of research at Shanghai-based consultancy Z-Ben Advisors. Allowing more long-term investors into the market will greatly improve its efficiency. Notoriously volatile, the Shanghai and Shenzhen stock markets are rife with insider trading and are largely driven by speculators who chase short-term trends with little regard for stock valuations. By bringing more institutional investors into the market reformers hope to bring more sophisticated and professional research and investment techniques. But few people expect that foreign groups will be able to pile into Chinese equities any time soon. Fraser Howie, co-author of Red Capitalism and other books on China's stock markets, says while Beijing has increased the total available QFII quota from $30bn to $80bn, not all the $50bn of new quota will be handed out at once. Beijing allocates quotas to individual institutions on a case by case basis in what participants say is an opaque and unpredictable process. Only institutions with at least five years of experience in asset management and $5bn in assets under management are eligible, although there are rumours that these requirements could be relaxed this year. "The allocation procedure, and the process of granting permission for withdrawal of funds, would have to become much simpler and faster to attract massive new foreign flows," says Dariusz Kowalczyk, a Hong Kong-based strategist at Crédit Agricole. Since its launch in 2002, the QFII scheme, pronounced "cuefee," has expanded only gradually and in stops and starts. As of the end of March, 158 institutions from 23 countries had been approved to invest a total of $24.6bn. There are signs, however, that Beijing will allocate investment quotas more rapidly now that the upper threshold has been raised. The CSRC has already stepped up the pace of QFII approvals since Mr Guo took control. Some 15 foreign institutions were granted a record $2.1bn of quotas in the past month alone, compared with $1.9bn for the whole of 2011. Mr Guo is able to get things done faster than his predecessor - partly because of his close relationship with Wang Qishan, China's vice premier in charge of economic and financial affairs, market participants say. Their relationship, the thinking goes, has allowed the CSRC to co-ordinate its operations much more closely with other regulators such as the People's Bank of China and the State Administration of Foreign Exchange (Safe), speeding up the pace of reform. Safe is in charge of granting investment quotas for QFII licences issued by the CSRC. What next? Besides foreigners, Beijing has been looking to broaden the range of domestic institutions that can invest in the country's capital markets. Just last month, Guangdong, a province in the south of China, mandated Rmb100bn ($15.9bn) of its pension funds to the National Council for Social Security Fund - the first time that local pension funds have been channelled into areas other than government bonds and bank deposits. Some analysts reckon that one factor driving Beijing's latest batch of policies is a desire to boost the Shanghai stock market, which has tumbled 62 per cent since its bubble-era peak in October 2007. The Communist party has long tried to manage asset prices through regulatory means. Speaking at a conference in Beijing in February, Mr Guo made the unusual remark that Shanghai blue-chip stocks were showing "exceptional value." Foreign investors should take note.