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东北财经大学本科毕业论文
合格境外机构投资者制度在中国大陆的实践的研究
——基于台湾合格境外机构投资者制度的实践经验
Research into the Practice of QFII Scheme
in Chinese Mainland —— Based on the
Experience of Taiwan QFII Scheme
作
者 Student Name
院
系 School / Institute
专
业 Programme
年
级 Grade
学
号 Student No.
指导教师 Supervisor
绩 Score
Surrey International Institute
Business Management
2009
2194009067
Associate Professor Yu-Kyung Kim
答辩日期 Date of Defense
成
SHI Fangyu
Abstract
This thesis attempts to compare Taiwan and Chinese Mainland’s Qualified Foreign
Institutional Investor (QFII) programs, explore the similarities and differences between
these two programs and predict whether Chinese Mainland will go the way which Taiwan
did. Through comparing thoroughly from QFII introduction backgrounds, reasons,
measures of QFII scheme itself, general effects to the ultimate fate of QFII scheme, we find
some important factors which differentiate two QFII schemes. Those essential factors
include the degree of interest-rate and foreign exchange-rate liberalization, the complexity
of macro-economic environment, the scale of economy and the size of foreign exchange
reserves. Therefore, the conclusion in this thesis has two aspects. Firstly, the progress of
capital account liberalization is inevitable and irreversible in China, and the deregulation
and phase-out of QFII program will be the goal of its introduction, just like what Taiwan did
on 2003. Secondly, however, it is impossible for Chinese Mainland to liberalize the capital
account as quick as Taiwan did in the 1990s, because Chinese Mainland faces different
reform circumstances, and more sophisticated internal and external macro-economic
environments. Thus, the road of deregulating the QFII program and realizing the goal of
capital account liberalization in China will be a more arduous and tortuous process than
that of other emerging economies.
Key words: Qualified Foreign Institutional Investor; Capital account liberalization;
Taiwan experience; Schemes Comparison
i
Contents
List of Tables ......................................................................................................................... i
List of Figures ...................................................................................................................... ii
List of Abbreviations ............................................................................................................ iii
Acknowledgments ............................................................................................................... iv
Chapter I. Introduction .........................................................................................................1
1.1 Research Background .............................................................................................1
1.2 Research Purpose ...................................................................................................2
1.3 Research Method ....................................................................................................2
1.4 Significance of This Thesis ......................................................................................2
1.5 Organization of This Thesis .....................................................................................3
Chapter II: Literature Review ...............................................................................................3
2.1 Related Theories of QFII Scheme ...........................................................................3
2.2 A Brief Review of QFII Related Researches ............................................................5
Chapter III: The Research into the Taiwan QFII Scheme .....................................................7
3.1 Economic and Financial Background of Introducing QFII Scheme in Taiwan ..........8
3.2 Reasons of Introducing QFII Scheme in Taiwan ......................................................9
3.3 The Evolution and Development of Taiwan QFII Scheme ......................................13
3.4 Stock Market Openness，Accessibility and Current Conditions ............................16
Chapter IV: The Development of QFII Scheme in Chinese Mainland ................................18
4.1 Background and Reasons of Introducing QFII Scheme in Chinese Mainland .......18
4.2 Evolution of Chinese Mainland’s QFII scheme ......................................................20
4.3 Openness and Current Conditions of Chinese Mainland’s Stock Market ...............24
Chapter V: Comparison of Taiwan and Chinese Mainland QFII scheme............................28
5.1 Similarities and Differences in Introducing Background .........................................28
5.2 Similarities and Differences in Schemes Themselves ...........................................30
5.3 Similarities and Differences in Effects of QFII Schemes on Stock Markets............32
Chapter VI: Conclusion ......................................................................................................40
6.1 Limitations of Study................................................................................................43
i
References ........................................................................................................................44
Appendixes ........................................................................................................................45
ii
List of Tables
Table 3-1 Changes of Qualification Requirements for Taiwan QFIIs
13
Table 3-2 Changes of Investment Quotas for QFII (billion USD)
14
Table 3-3 Changes of QFII Shareholding Limits
14
Table 3-4 Investment Tools and Industries Restriction for QFII
15
Table 3-5 Changes of QFII’s Capital Inward Remittance and Repatriation
16
Table 4-1 Changes of QFII Qualifications
22
Table 4-2 Changes of Shareholding Cap
23
Table 4-3 Changes of Restrictions on RMB Financial Instruments
23
i
List of Figures
Figure 3-1 Comparison of Turnover Ratio in terms of Trading Value in Major Stock Market11
Figure 3-2 Comparison of P/E Ratio in Major Stock Markets
11
Figure 3-3 Highlights of Securities Margin Trading on TSEC Market
12
Figure 3-4 Comparison of Volatility in Major Stock Markets
12
Figure 4-1 QFII Investment Quota and Market value of A-shares held by QFIIs
25
Figure 4-2 Market Capitalization of Several Emerging Economies’ Stock Markets
27
Figure 4-3 Turnover Rate of Several Emerging Economies’ Stock Markets
28
Figure 5-1 Net QFII Capital Inflow Comparison
33
Figure 5-2 Share of Annual Stock Trading Volume in 2010
34
Figure 5-3 The Changes of Investors’ Structure in Taiwan Stock Market
34
Figure 5-4 The Changes of Turnover Rate in Taiwan Stock Market
37
Figure 5-5 The Changes of Turnover Rate in Chinese Mainland Stock Market
37
Figure 5-6 PE Ratios of Four Different Stock Markets
38
Figure 5-7 Changes of PE Ratio in Chinese Mainland’s Stock Markets
39
ii
List of Abbreviations
CAPM: Capital Asset Pricing Model
CSRC: China Securities Regulatory Commission
GFII: General Foreign Individual Investor
IAPM: International Asset Pricing Model
IOSCO: International Organization of Securities Commission
PBC: People’s Bank of China
QDII: Qualified Domestic Institutional Investor
QFII: Qualified Foreign Institutional Investor
SAFE: State Administration of Foreign Exchange
SASAC: State-owned Assets Supervision and Administration Commission
TSEC: Taiwan’s Securities and Futures Commission
iii
Acknowledgments
I would like to thank my grandparents for their meticulous care to me for the past 21 years,
thank my parents for enabling me to receive such excellent but also very expensive
university education, and many thanks to all my family members and relatives.
Also, I want to thank my dissertation tutor, Professor. Yu-Kyung Kim, for his valuable time,
knowledge, experience and advices input into my thesis. His elaborate guidance ensure
this thesis to be finished smoothly.
Moreover, I want to acknowledge all my friends and classmates who help and support me
during the completion of my thesis and the time we spent in university.
iv
Research into the Practice of QFII Scheme in Chinese Mainland
—— Based on the Experience of Taiwan QFII Scheme①
Chapter I. Introduction
1.1 Research Background
In 1990s, many emerging economies began to liberalize their capital account to allow
capital to flow inward and outward freely. In April 1997, the Interim Committee of
International Monetary Fund (IMF) agreed to amend the articles to promote that “the
liberalization of capital movements is one of the purposes of the IMF”, and this
announcement issued in a statement at the Annual Meetings of World Bank and IMF in
Hong Kong in the same year September ( Eichengreen & Mussa, 1998). However, after this,
the Asia Financial Crisis happened and made the developing countries which initially
attempt to take advantage of the large volume of international financial flows to develop
their domestic economy, but eventually the radical capital account liberalization policies
hurt themselves deeply. Thus, made the questions of whether one country should liberalize
their capital account and what sequence should the country follow became a hot debate.
On December 1st 2002, “The Provisional Measures on Administration of Domestic
Securities Investments by Qualified Foreign Institutional Investors (QFII)” was jointly
promulgated by China Securities Regulatory Commission and People’s Bank of China
which marked the first step of Chinese securities market opening. After 11 years’
development, there were 213 QFIIs permitted to invest in Chinese securities market and
the total quotas accumulated at US $ 41.745 billion (CSRC, 2013).
In January 14th 2013, the former chairman of China Securities Regulatory Commission Guo
Shuqing said that the quotas of Qualified Foreign Institutional Investor (QFII) can be
increased by 9 or 10 times on the Asian Financial Forum (China Securities Journal, 2013).
①
In order to make a template, the dissertation contents may have been edited.
1
If that is the case, the total quotas of QFII will be US $ 720 or 800 billion. However, on the
other side, the foreign exchange reserves reached at US $ 3,311.6 billion at the end of
2012, and China now is the biggest holder of foreign exchange reserves in the world (PBC,
2013). Besides, since 2005 when Chinese authorities employed market-based managed
float exchange-rate mechanism, the real exchange rate of RMB had increased by 31.9%
during those eight years (SAFE, 2013). The rigid foreign exchange-rate regime and high
expectations of RMB appreciation increased the contradictions between capital account
liberalization and rapid increase of foreign exchange reserves. Thus, the reform of Chinese
financial system has come to a crossroad, and which road this giant would choose to go
arouse our interest.
1.2 Research Purpose
The aims of this paper are that: a) to find out the development history of QFII schemes in
Taiwan and Chinese Mainland; b) to compare the Taiwan’s QFII program with the Chinese
Mainland’s QFII program and find out differences and similarities; c) analyzing the
differences, find out the reasons behind them, and predict the future of Chinese Mainland’s
QFII program.
1.3 Research Method
In this article, I use both descriptive and exploratory research methods. I use descriptive
research methods to describe QFII development histories in Taiwan and Chinese Mainland
respectively, and make comparisons. Besides, I use exploratory research methods to
analyze two different QFII schemes and explain reasons. The datum used in this paper is
mainly secondary datum which is cited from the internet, some official websites and other
people’s academic literatures.
1.4 Significance of This Thesis
Numerous studies have been done about QFII scheme in terms of general comparison and
giving policy suggestions, but there are a few research papers that investigate deeply into
the reasons behind the differences and predict the future through analyzing the history. In
2
this thesis, through comparing and analyzing the difference of QFII introduction background,
the reasons of differences, and the current conditions of two stock markets, predict whether
the similar outcomes may happen in Chinese Mainland as in Taiwan. More importantly,
through comparison, relevant policy makers can formulate policies which conforms to
Chinese Mainland’s actual conditions in the future, and also, stock market investors can
have a general overview of stock market’s prospects.
1.5 Organization of This Thesis
The main content of this thesis consist of six chapters. The first chapter includes the
research background, research purpose, research method and significance of this thesis.
In the second chapter, there is a Taiwan QFII scheme development history. In the third
chapter, we will describe the past and current conditions of China’s QFII program. In the
fourth chapter, there will be a comparison of two QFII schemes and aim to find out the
differences and similarities. The sixth chapter is the last chapter of this paper which
concludes and states the limitations of this research.
Chapter II: Literature Review
Definition of QFII
Qualified Foreign Institutional Investors (hereinafter referred to as "QFII" which can be a
single or a plural, as the case may be) are defined as overseas fund management
institutions, insurance companies, securities companies and other assets management
institutions which have been approved by China Securities Regulatory Commission
(hereinafter referred to as "CSRC") to invest in China's securities market and granted
investment quota by State Administration of Foreign Exchange (hereinafter referred to as
"SAFE") (CSRC, 2002).
2.1 Related Theories of QFII Scheme
2.1.1 The Theory of Financial Liberalization
3
Financial liberalization is the process of enabling the operation of a nation’s financial sector
to transfer from state controlled economy to the market economy. It has two parts, one is
the liberalization of financial asset pricing and the other is internalization of capital mobility.
As for the theory of financial asset pricing liberalization, the representative is Ronald
McKinnon (2006) and he stated that if the interest rate and foreign exchange rate are
strictly regulated by government for a long time, the pricing of them tend to be seriously
distorted. So, in order to open up the domestic stock market, it is better to liberalize the
interest rate and float currency first, since they are the essentials of resources allocation.
Internalization of capital mobility means allowing foreign capital enter into domestic market
and also permit domestic investors to invest outside, that is to say, giving capital enough
freedom to invest globally. Currently, along with the QFII scheme, China also introduced the
QDII① program to utilize the huge volume of foreign reserves to invest globally.
2.1.2 The Theory of Opening Up Capital Account
The theory of opening up capital account means relax or abolish the regulation of capital or
financial account, which include the cross-border capital transfer, direct investment,
securities investment and other investments.
For the good side, the opening up of capital account enables the country get the foreign
capital to boost the domestic economy as well as to add vitality into the stock market.
Nevertheless, on the bad side, the reform of financial system is a high risk activity, if one
country choosing the wrong strategies, the bad results are inevitable. Regarding Taiwan as
an example, which used a gradual opening up policy and embraced the economic take-off
ultimately. However, the country likes Thailand which experienced a major financial crisis
during 1997 Asia Financial Crisis because of its radical opening up strategies.
2.1.3 The Standard International Assets Pricing Model (IAPM)
①
QDII: Qualified Domestic Institutional Investor is an institutional investor that has met certain
qualifications to invest in securities markets outside its home country.
4
The IAPM is a variant of the capital assets pricing model (CAPM), and usually used in
allocating international investments. The CAPM was created by economist William Sharpe
in mid-1960s (Richard, 2009), and this model can be used to evaluate the rate of return one
investor can get from the asset which has a certain level of risks. According to this model,
the rate of return of an investment should equal to its cost of capital, and the higher returns
always accompanied with higher risks.
Therefore, following the logic of CAPM, the stock market liberalization may lower the cost of
capital, because the risks of stock market are shared by domestic investors and foreign
investors after opening. Later, this reasoning had been tested by Peter Blair Henry’s
research in 2000, and he found that a country’s aggregate equity price index experiences
abnormal returns of 3.3 percent per month in real dollar terms during an eight-month
window leading up to the implementation of its initial stock market liberalization.
2.2 A Brief Review of QFII Related Researches
2.2.1 Foreign Scholars
Prasad and Rajan (2008) believe what the cross-country regressions suggest that there is
a little connection between foreign capital inflows and rapid economic growth for developing
countries or emerging markets. They find that the major benefits of capital account
liberalization may bring to emerging economies is indirect such as speeding up institutional
development and financial factor development, and catalyzing the optimization of corporate
governance of listed companies. Besides, they state that the capital account liberalization is
inevitable for modern countries, because the openness of international trade and utilizing
the methods like under-invoicing and over-invoicing can easily make the capital accounts
become more open, even through governments implement capital account control policies.
Eichengreen and Mussa (1998) also state that the capital account liberalization and
financial liberalization are inevitable for both developing and industrial countries, because
the quick development of communication technologies reduce the chances of information
5
asymmetry between different regions and increase the mobility of international capital.
Besides, they also warned that the sudden opening of capital account is full of risks, and
both government and corporate governance should emphasize more on risk management.
Finally, they stress that in order to make best use of capital inflows, government should set
up appropriate macro-economic policies as well as pursue right opening sequence.
Lin and Chen (2006) conducted the research through analyze the returns of the highest
and lowest 10 stocks in three certain industries which held by QFIIs before and after the
liberalization in Taiwan and found from their empirical research that firstly, the shares
largely held by QFIIs tend to have better performance than those shares less held by QFIIs;
secondly, the performance of QFII was better after deregulating the QFII system than the
performance before liberalization, and this means the deregulation of QFII system do bring
some benefits to give foreign investors more free space to employ their professional
investment skills. Also, because of good performance of QFIIs, herd behavior tends to
appear among individual investors.
Henry (2000) stated that according to correctness of the standard IAPM, the country’s
aggregate cost of equity capital will fall when it opens its stock market to foreign investors.
Holding the future cash flows remains unchanged, and it can be seen that there was an
increase in emerging economies’ equity price index when the stock market predicts an
upcoming stock market liberalization. So, a fall of cost of equity capital means listed
companies can finance their their productions at a lower cost, this is the case, because the
falling of the cost of equity capital will turn some investment projects which initially had a
negative net present value (NPV) to positive NPV. Thus, listed companies can operate
more efficiently, and further, made the entire economy benefit from foreign investment.
2.2.2 Chinese Scholars
Qibin & Ba, Shusong (2003) mainly focus on the effects of QFII on the stock markets and
the deregulation processes of QFII schemes in Taiwan and India. Moreover, they give some
suggestions on Chinese Mainland’s QFII system like supervision enhancement and
6
deregulating restrictions.
Pan, Wenrong (2010) stated that after the introduction of QFII and QDII programs, Chinese
stock markets’ co-movement with other global stock markets have been increased.
According to his research, the correlation of Chinese stock markets’ stock prices with other
Asia stock markets has been strengthened but still in a weak correlation condition.
In sum, foreign scholars tend to treat the emerging markets as a whole and research more
on the merits and demerits of capital account liberalization. Chinese scholars tend to
compare the similarities and differences of Taiwan and Chinese Mainland’s QFII scheme
and give decision-makers some suggestions. Only a few researches dig out the reasons
behind the capital account liberalization in Taiwan and Chinese Mainland and predict the
future of Chinese Mainland’s QFII scheme. Therefore, we try to integrate the excellent
research outcomes which did by both foreign scholars and Chinese scholars, and analyze
the QFII scheme deeply and in more details.
Chapter III: The Research into the Taiwan QFII Scheme
As a predecessor of QFII scheme in China, Taiwan’s successful experience can always be
treated as a blueprint for other emerging economies to learn. Going back to 1982, Taiwan
government formulated the plan of introducing QFII scheme and divides it into three stages.
First, it was to open the securities market indirectly through issuing Overseas Beneficiary
Certificates and Closed End Funds to enable the foreign investors invest in Taiwan stock
market indirectly, and this period is from 1983 to 1990. The second stage is using QFII
scheme to introduce foreign institutional investors invest in stock market directly but under
some restrictions, and it is worth to see that in 1996 Taiwan allowed the individual
foreigners to invest in stock market, and this period is from 1991 to 2003. The final stage is
the period after 2003 when Taiwan announced to abolish QFII scheme and did not set
restrictions for mobilizing of international capital any more, and completely open the
securities market for all kinds of foreign investors (Lu, 2003).
7
3.1 Economic and Financial Background of Introducing QFII Scheme in Taiwan
3.1.1 Economic Background
In the 1980s, Taiwan began to upgrade its industries and turning the traditional
manufacturing industries to high technology industries, therefore, a group of big electronics
company began to appear. In order to develop those capital intensive industries, injecting a
huge amount of money to coordinate with the development of industry upgrading is needed.
Thus, Taiwan opening the direct investment channel for foreign investors to invest in
securities market on a step by step basis.
3.1.2 Financial Background
In the 1980s, the economic structure of Taiwan changed dramatically, and government
emphasized more on freedom rather than regulation to boost economy. During this period,
increasingly commodities exportation lead to enlarge the foreign trade surplus, and the
continuous increase of foreign exchange reserves exert huge pressure to the domestic
money supply. So, the foreign exchange rate of Taiwan dollar forced to rise continuously.
The complicated new situations push the Taiwan central bank to change the old foreign
exchange policy and interest rate policy to adapt the fast development of economy, and
promote financial liberalization and internationalization.
Interest rate liberalization: In the 1970s, Taiwan began to appear inflation, and the
government tried to control it by interest-rate hike and cut, but facing more and more
complex economic conditions, government regulations became less and less efficient and
effective. Therefore, at the start of 1980s, Taiwan began to liberalize the interest rate. The
first step is in 1980 when commercial banks can set loan rates themselves under the upper
and lower limits set by Central Bank of Taiwan. In 1986, the commercial banks can set their
own saving interest rates accord with their own operation conditions and capacity.
Eventually, in 1989, commercial banks did not need to follow the Central Bank’s upper and
lower limits of interest rate anymore and this marked the complete interest rate
liberalization in Taiwan.
8
Exchange rate liberalization: In 1970s, with the collapse of the Bretton Woods system,
Taiwan decided not to fix its exchange rates by tying Taiwan dollars to the US dollars and
allowed the exchange rates to float to adjust the changes in the market. In 1979, Taiwan
established foreign exchange market, and set up central exchange rate system which
means the actual market exchange rate can just float under the upper and lower limits.
Moreover, in 1980s, the trade conflicts between America and Taiwan became aggravated,
the trade surplus in Taiwan became larger and larger. Therefore, America forced Taiwan to
abandon the central exchange rate system and appreciate Taiwan dollar. Finally, in 1989,
Taiwan realized the liberalization of exchange rate, and let it decided by the market demand
and supply.
From the financial liberalization process of Taiwan, we can find that the internal financial
liberalization was go ahead of financial internalization, and because of this, the market
determination of interest-rate and exchange-rate can help to lay the solid foundation for the
capital account opening and enabling the opening process of securities market to be more
smoothly.
3.2 Reasons of Introducing QFII Scheme in Taiwan
3.2.1: The Basic Needs of Rapid Economic Development and Boom of International Trade
Practices show that the free market can allocate and pricing resources in a more effective
and efficient way than government. Moreover, as the first step of economic opening, the
boom of trade let Taiwan becomes more international. Then, finance, as an important role
in globalization, need to be literalized to compatible with the development of the economy.
Therefore, QFII was adopted as a gradual opening up policy help the finance sector realize
the liberalization.
3.2.2: Industries Structure Changes and Upgrading
In the early 1980s, Taiwan government made several economic development plans and
established some high-technology industry parks to promote the Taiwan’s high-tech
industries. In order to expand the funding sources of economic development, introduction of
9
the foreign investment into Taiwan stock market through QFII scheme became a good
choice. Later, it was found that the introducing QFII scheme was a wise decision. And other
researchers find that the shares of listed electronic companies accounts for over 50% of
daily trading value of QFIIs (Lin & Chen, 2006). So, the foreign investors do contribute to
the take-off of Taiwan electronic industries.
3.2.3: Saving the Immature Stock Market
During the late five years of 1980s, Taiwan experienced a great surge in stock market, and
the average PE ratio reached 100. Then, at the beginning of 1990, Taiwan stock index
reached the highest peak ever at 12682.11, and then beginning to drop to 2485.25 in the
middle of October. The stock index dropped by 80% during 8 months and it was the
greatest fall ever in the world securities history. In order to restore market confidence,
Taiwan introduced the QFII scheme formally in January 1991. Obviously, Taiwan hoped
foreign investment capital can inject more money to the stock market and save it from crisis.
Thus, we can find that in all aspects Taiwan stock market is an immature stock market.
Generally speaking, there are four distinct features for an immature stock market, they are
high turnover ratio, high PE ratio, high percentage of margin trading and high price volatility
(Lin and Chen, 2006). And below are charts and statistics.
a) High turnover ratio: It can be clear that before introducing QFII program, Taiwan stock
market’ s turnover ratio was the highest among 7 stock markets and it was nearly 6 times
more than those of other stock markets. And this situation of having very high turnover ratio
stands in sharp contrast to the low turnover ratio among those highly developed stock
markets like New York Stock Exchange or London Stock Exchange. The condition of having
very high turnover ratio in Taiwan lasted for a long time.
10
Figure 3-1
Source: Taiwan’s Securities and Futures Commission (Lin & Chen, 2006)
b) High PE ratio: Comparing with other developed stock markets, it can be seen that
before 1995, Taiwan stock market’s PE ratio was the second highest among 7 stock
markets, and just a little bit lower than that of Japan. The reasons behind are that the
shares’ prices are overvalued and the profitability of listed companies were not good
enough, because listed companies put more efforts on making individual investors happy
rather than implementing long-term development strategies.
Figure 3-2
Source: Taiwan’s Securities and Futures Commission (Lin & Chen, 2006)
c) High percentage of margin trading: The chart illustrates that the margin trading took
11
nearly 30% to 40% of stock market trading from 1994 to 2002, and around 5% of them are
short selling. Both of those investment instruments can be used as either hedge tools or
risky speculative tools. Overusing the investment instruments like margin trading can easily
fluctuate share prices and make the stock market unstable.
Figure 3-3
Source: Taiwan’s Securities and Futures Commission. (Lin & Chen, 2006)
d) High price volatility: According to this line chart, we can find that Taiwan stock market’s
volatility peaked at 2 in 1992, which demonstrate the volatility of Taiwan stock market was
quite high compare with those of other mature markets. High price volatility may caused by
overusing margin trading and short selling. Also, inefficient information disclosure system
sometimes may cause overreaction among investors and lead to high price volatility.
Figure 3-4
Source: Taiwan’s Securities and Futures Commission (Lin & Chen, 2006)
12
3.3 The Evolution and Development of Taiwan QFII Scheme
The QFII as a transitional scheme has many restrictions in terms of investors’ qualifications,
shareholding percentages, investment tools and industries, remittance and repatriation of
capital as well as investment quotas at the time introduced it. And those restrictions can
guarantee the stabilization of the domestic financial system and prevent from the sudden
strike of hot money.
3.3.1 The Qualification Requirements for QFII
Table 3-1: Changes of Qualification Requirements for Taiwan QFIIs
Bank
Insurance company
World
rankings in
term of
total assets
(top of )
Minium
securities
assets
under
managed
(>= billion
USD)
1991.1
500
1993
Fund management
company
Years of
engaging in
insurance
business
(>=years)
Minium
securities
assets
under
managed
(>= billion
USD)
Years of
setting up
(>=years)
Total
assets of
investment
funds (>=
billion
USD)
0.3
10
0.5
5
0.5
1000
0.3
5
0.5
3
0.3
1995.8
1000
0.3
3
0.3
3
0.3
2001.5
No need
0.2
1
0.2
1
0.2
Source: Karen Lu (2003)
Qualification criteria include the types of business, operation term, business scale and
operating performance. As for the types of business, the table above shows that the stock
market only opening for bank, insurance company and fund management company in 1991,
and in 1993, QFII eligibility extended to include securities companies. In 1995, foreign
governments’ sovereign wealth funds and pension funds were permitted to enter into
Taiwan stock market. In 1996, the qualifications extend to the mutual funds and investment
trusts; also the introduction of GFII① scheme allowed non-resident individuals of Taiwanese
origin or otherwise to invest in stock market in the same year. From above we can find that
from adopting to abolishing of QFII scheme, Taiwan spent 10 years to make the dream
come true, and we can find a clear path of stock market opening. The rigorous criteria on
①
GFII: General Foreign Individual Investor is similar to Qualified Foreign Institutional Investor, but the
scope of investors is bigger which include non-resident individuals of Taiwanese origin or otherwise.
13
investors’ qualifications can make sure QFIIs can act in the long-term benefits of Taiwan
stock market.
3.3.2 Quota Restrictions
Table 3-2: Changes of Investment Quotas for QFII (billion USD)
1991.2
1993
1994
1995
1996
1999
Quota
limits for
single
QFII
0.005-0.05
0.05-0.1
(January)
0.05-0.2
(November)
0.05-0.2
0.05-0.4
(December)
0- 0.6
0-1.2
Quota
limits for
the whole
QFII
2.5
5
(November)
7.5
(April)
No restriction
——
——
Source: CSRC, 2006
The purpose of setting the upper limits for QFII quota at the beginning is to adjust the
investment scale to the overall economic development conditions, and make sure the
whole economy can bear the impact of foreign investment. Then, after several years’
observation, the policy maker canceled the upper quota limits for the whole QFII, and all
foreign institutional investors can invest in Taiwan unless they are not qualified.
3.3.3 Shareholding Restrictions
Table 3-3: Changes of QFII Shareholding Limits
Time
1991.1
Total
shareholding
percentages
(<=%)
Shareholding
percentages of
a single QFII
(<=%)
10
5
1995.7
12
6
1995.9
15
7.5
1996.3
20
7.5
1996.11
25
10
1998.1
30
15
1999.3
2000.12
50
No Need
(except for
some special
industries )
50
No Need
(except for
some special
industries )
Source: CSRC, 2006
The QFII shareholding limits build a ceiling for investors to invest in a certain company. This
kind of restrictions can prevent foreign investors from controlling some important and
special companies and disturbing the economic order. But with the strengthening of the
14
economy and in order to enhance the resource allocation ability of market, the limits of
shareholding percentages relaxed gradually. Before 1999, a single QFII can only buy 15%
of a listed company’s common stocks at most, and this shareholding cap made QFII
sometimes cannot enter into listed companies’ board of directors and participate in
corporate governance directly.
3.3.4 Investment Tools and Industries Restrictions
Table 3-4: Investment Tools and Industries Restriction for QFII
1991.1
1992
1995
Less than
10% of
capital can
be invested
in money
market
instrument.
The money
market
instrument
has an
investment
cap of 30%
1998
2000
QFII can
invest in
convertible
bond and
low-rating
financial
bond
Investment
tools
restrictions
10% of
capital must
be invested
in 3-month
fixed time
deposit
Industries
restrictions
Investments in industries like agronomic horticulture, pesticide industry,
transportation, telecommunication, postal savings and film and television
have some special restrictions.
Opening the
index futures
market to
QFIIs
Source: CSRC, 2006; Lin & Chen, 2006
The establishment of investment tools restrictions is to protect certain part of immature
securities markets from the impact of foreign investment capital, and it is also a useful way
to guide capital flow to somewhere it being needed. Moreover, it is noticeable that QFIIs
can invest in Taiwan stock index futures market in 1998, which enables QFIIs to hedge their
stock investment and lock-in market risks and this sort of risk avoidance mechanism
prevent big turbulence in stock market.
As for industries limitations, there are four types of industries which were restricted to invest
by foreign capital by some laws and regulations of Taiwan. According to Taiwan Stock
Exchange Corporation, the four types of industries are follows: a) agronomic horticulture
and pesticide industry which regulated by the Mineral Law and foreign investment in this
industry cannot surpass 50% of the total tradable shares; b) on the basis of Article 2 of the
Ship Law, the foreign investments cannot exceed 1/3 of the shipping company’s total
tradable shares; c) the law of Highway totally forbids the foreign investors to invest in the
15
island transportation; d) the Regulations of Supervising Private Utilities Business set a
ceiling for foreign funds that they cannot invest more than 49.99% of the utility company’s
total trading shares (Lin & Chen, 2006).
3.3.5 The Restrictions for Inward and Outward Capital Remittance
Table 3-5: Changes of QFII’s Capital Inward Remittance and Repatriation
1991.1
Restrictions
QFII needs to
remit the
principal within 3
months after
receiving the
approval, and
the principal
need to stay in
Taiwan for at
least 3 months.
The remittance
and repatriation
cannot exceed 4
times a year.
1996
1997
Lock-up period
restriction for
principal and
capital gains is
lifted.
The QFII fund
remittance which
lower than 50
million US
dollars do not
need the
approval of
Taiwan
Administration of
Foreign
Exchange.
2001
Extend the
principal
remittance term
to 2 years.
Source: CSRC, 2006
The remittance and repatriation restrictions can make sure the stability of exchange rates
and exchange reserves, and also guarantee the foreign capital inflow and outflow would not
disturb the formal economic order.
3.4 Stock Market Openness，Accessibility and Current Conditions
Before deregulating the QFII program, whether Taiwan should remove it was hotly debated.
The advocates think that the deregulation enable more and more participant enter into the
domestic capital market to compete with each other, and fierce competition may lower the
financing costs for Taiwan companies, in turn, promote the economic development. Just
like what Bekaert and Harvey (1997) stated that the cost of capital always decreases after
capital market liberalization. Nevertheless, others think that regulations should not be
abolished, because not all of foreign institutional investors are “qualified”. If QFII scheme
was removed, huge amount of hot money would flow into stock market and destabilize the
16
economic order, just like what happened in Thailand or Indonesia in 1997.
Lin and Chen (2006) conducted the research through analyzing the returns of the highest
and lowest 10 stocks in three certain industries which were held by QFIIs before and after
the liberalization in Taiwan and found from their empirical research that a): the shares
largely held by QFIIs tend to have better performance than those shares less held by QFIIs;
b): the performance of QFII was better after deregulating the QFII system than the
performance before liberalization. and this means the deregulation of QFII system do bring
advantages to QFIIs and individual investors who pursue the investment decisions of QFIIs.
At the end of 2001, Taiwan’s securities and futures commission approved 1,958 QFII
applications in total, and the total quota reached at 230 billion USD. Until 2002, the
shareholding of QFII took nearly 9.49% of the whole market capitalization, and became an
important group in Taiwan stock market. In 2003, Taiwan announced to abolish the QFII
scheme and realized the securities market liberalization. According to the Ernst & Young’s
Annual report of globalization in 2010, in terms of factors like trade openness, capital
mobility and others, Taiwan rank 12th in the world, and rank 3th in Asia, just below Hong
Kong and Singapore (wenweipo, 2011). From this, it can be seen that Taiwan stock market
become truly internationalized.
All in all, we can find that in the long-run, the merits of capital account liberalization
outweigh the demerits. When more and more foreign investors come into stock market,
they will bring not only huge amount of capital, but also competition, advanced investment
skills, behaviors and values which will benefit stock market and the entire economy in the
long-run. Nevertheless, we also need to notice that Taiwan and Chinese Mainland are two
different jurisdictions, therefore, when we learn from Taiwan’s experience, we cannot ignore
our own special economic and social conditions.
17
Chapter IV: The Development of QFII Scheme in Chinese Mainland
Shanghai Stock Exchange and Shenzhen Stock Exchange were established in 26 th
November 1990 and 1st December 1990 respectively and until now they have only the 23
years operation history. But the development pace of these two exchanges is quite rapid,
and until now Shanghai Stock Exchange has 954 listed companies and the total market
capitalization is RMB 15,665.21 billion, and Shenzhen Stock Exchange has 1538 listed
companies, and RMB 7,589.41 billion in total market capitalization (SSE & SZSE, 2013).
As for QFII scheme, Chinese Mainland introduced it a decade later than other emerging
economies. The reasons are that, going back to the early 1990s, Chinese Mainland just
beginning to set up special economic zones to open the international trade, the whole
process of economic development is lagged behind for several decades. So, the time of
introducing QFII scheme initiated 10 years later when many emerging markets like Taiwan
or South Korea had already realized the securities market liberalization. However, the
positive side of late opening is that we can learn from those predecessors and lower the
risks of conducting financial reform.
4.1 Background and Reasons of Introducing QFII Scheme in Chinese Mainland
The earliest attempt of opening the stock market to foreign investors can date back to 1991,
in order to solve the problem of lacing the foreign exchange reserves and development
funds, Chinese Mainland open the B-share① market which denominated in US dollars or
Hong Kong dollars and only open to foreign investors. But for a long time, the trading
volume is quite small and this market lacking liquidity, so, it is not too popular among
foreign investors. Therefore, in 19th February 2001, Chinese Mainland permit to open
B-share market to individual Chinese investors, and hope to boost this market.
In 2001, after becoming an official member of WTO, according to its accession
commitments to WTO, financial industries like commercial bank, securities market and
①
B-share: B-shares are ordinary shares denominated in renminbi but traded in foreign currencies, and
the price quotes and dividend payments are also in foreign currencies (US dollars for Shanghai B-shares,
Hong Kong dollars for Shenzhen B-shares).
18
insurance companies need to open to foreign companies, so now it is common to see
HSBC or Citibank in China. Moreover, as one of the WTO promises, foreign investors can
invest in B-share directly and need agent no more, but obviously, the size of B-share is too
small to meet the need of foreign investors. Like other emerging economies, the next step
would be to open the capital market gradually.
According to the statistics provided by the World Federation of Exchanges (2012), in terms
of trading volume, Shanghai Stock Exchange and Shenzhen Stock Exchange rank 4 th and
5th in the world respectively in the end of 2012. Chinese stock market is quite young but has
grown at a fast speed. However, comparing with other well operated stock markets, there
still exist several gaps for Chinese to narrow such as growing up in a relatively closed
environment, highly regulated interest-rate and foreign-exchange rate, defective legal
system and all of those stifle the internationalization of stock market.
4.1.1 Deformed Ownership Structure: Separation of Trading Shares and Non-trading
Shares
At the end of 2012, there are 953 listed companies are state-owned holding companies
which means the state-owned capital is the majority comparing with other shareholders.
And the number of this kind of companies consist 38.5% of all companies which listed in
A-share① market, and in terms of market capitalization, stated-owned holding companies
took 51.4% of total A-share market capitalization (Wang, 2013). Going back to 2006, a lot of
state-owned listed companies had a large part of non-trading shares. At the highest peak,
only one-third of the total stock issue is tradable shares, and the price of those shares does
not reflect the real value of the companies. Therefore, the stock market cannot act as a
good resources allocator, because a small number of tradable shares distort the real value
of the company and also the attempt of business merger and acquisition would be very
expensive. In May 2005, China initiated the reform of non-tradable shares, to correct the
pricing mechanism which was distorted by large volume of non-trading shares.
①
A-share: A-shares are ordinary shares denominated and traded in renminbi and the price quotes and
dividend payments are also in renminbi.
19
4.1.2 Regulation of Interest-rate and Foreign Exchange-rate
The sequence of opening up policy need to be carefully planned, otherwise, the whole
economy would be negatively affected. Generally, the sequence of internationalization is
international trade liberalization; interest-rate and foreign exchange-rate liberalization and
then the securities market liberalization can be realized. Until now, because of the
economic complexity and huge amount of foreign exchange reserves, interest-rate and
foreign exchange-rate are still regulated by Chinese government. Thus, in short term,
opening up the capital market completely is unpractical.
4.1.3 Defective Legal System and Regulatory System
The regulatory framework of Chinese Mainland’s financial market was developed in a
closed environment and commensurate with the development of socialist market economy,
therefore, a lot of things are need to learn from other developed financial markets. Solely in
the first half year of 2012, there were 96 insider trading cases according to CSRC’s report.
If more international institutional investor enter into the Chinese Mainland’s stock market, a
sound regulatory framework which compatible with international standards to regulate and
supervise the capital market is highly needed. However, obviously, the establishment of a
good regulatory framework needs time.
4.2 Evolution of Chinese Mainland’s QFII scheme
There were three major easing changes in QFII Measures, as for “Provisional Measures on
Administration of Domestic Securities Investments of Qualified Foreign Institutional
Investors(QFII)” which came into effect on 1st December 2002, and then “Measures on
Administration of Domestic Securities Investments by Qualified Foreign Institutional
Investors” which came into effect on 1st September 2006, and the one close to writing this
paper was “Administrative Measures for Securities Investments in China by Qualified
Foreign Institutional Investors” which came into effect on 27th July 2012. And it can be seen
that there was a clear pathway which passed by Chinese stock market liberalization.
20
4.2.1 The Changes of QFII Qualifications
It can be seen from Table 4-1 that the qualification requirements for various investment
entities had loosened constantly throughout this decade in terms of two important aspects:
business operating years and lower limits of managed securities assets. The 2002’s
Provisional Measures is quite strict compare with Taiwan’s initial Measures, the
requirement of managed securities assets not less than US $10 billion screened many QFII
quota competitors. In 2006, the Measures eased restrictions for long-term investors like
insurance companies and fund management institutions; also allowed other institutions like
pension funds or charitable funds to join in. In 2012, restrictions relaxed again for nearly all
kinds of institutions, for instance, there are no ranking requirements for commercial banks
any more, the securities assets needs declined to US$ 0.5 billion rather than the previous
US$ 10 billion. Deregulation attempts to attract more small but capable foreign institutional
investors to invest in Chinese Mainland’s stock markets.
4.2.2 Changes of Shareholding Cap
The upper limits of holding one listed company’s outstanding shares by single QFII remain
unchanged for a decade, however, the regulations of the upper limits for total shares of a
company held by all QFIIs enlarged to 30% in 2012 from 20% in 2002. The shareholding
capped at certain percentage is to prevent the QFII from controlling certain companies or
industries, meanwhile, lowering the risks of manipulating share prices by QFIIs. Obviously,
the bad side will be that QFII cannot participate in companies’ corporate governance
process directly.
4.2.3 Changes of Restrictions on RMB Financial Instruments
From the table 4-3, on the one hand, the investment scope became larger and larger, QFIIs
have more choices to allocate their investment, like stock index futures which is permitted
for QFII in 2012, and QFII can hedge their equity portfolio. On the other hand, it
demonstrates that the space for financial innovations is very big, more derivative
instruments can be introduced to boost the financial market.
21
Table 4-1: Changes of QFII Qualifications
2002
2006
2012
Commercial
Banks
Ranking among the top 100
of the world in the total
assets for the most recent
accounting year and
managing securities assets
of not less than US$10
billion.
(Remain unchanged)
Having operated
commercial bank business
for over 10 years with tier
one capital not less than US
$ 0.3 billion and managing
securities assets no less
than US$ 0.5 billion in the
most recent accounting
year;
Insurance
Companies
Having operated insurance
business for over 30 years
with paid-in capital of not
less than US$1 billion and
managing securities assets
of not less than US$10
billion in the most recent
accounting year;
Having operated insurance
business for over 5 years
and managing securities
assets of not less than
US$5 billion in the most
recent accounting year;
Securities
Companies
Having operated securities
business for over 30 years
with
paid-in capital of not less
than US$1 billion and
managing securities assets
of not less than US$10
billion in the most recent
accounting year;
(Remain unchanged)
Having operated securities
business for over 5 years
with
paid-in capital of not less
than US$ 0.5 billion and
managing securities assets
of not less than US$ 5 billion
in the most recent
accounting year;
Fund
management
institutions
Having operated fund
business for over 5 years
with the most recent
accounting year managing
assets of not less than
US$10 billion;
Having operated Fund for
over 5 years with the most
recent accounting year
managing assets of not less
than US$5 billion;
Having operated Fund for
over 2 years with the most
recent accounting year
managing assets of not less
than US$0.5 billion;
Having operated for over 5
years with the most recent
accounting year,
managing securities assets
of not less than US$5 billion;
(Remain unchanged)
Others
(Pension funds,
Sovereign
wealth funds,
etc. )
Not permitted.
Source: CSRC.
22
Having operated insurance
business for over 2 years
and managing securities
assets of not less than
US$ 0.5 billion in the most
recent accounting year;
Table 4-2: Changes of Shareholding Cap
2002
2006
2012
Single QFII
Shares held by each
QFII in one listed
company should not
exceed 10% of total
outstanding shares
of the company;
(Remain
unchanged)
(Remain
unchanged)
Total QFIIs
Total shares held by
all QFII in one listed
company should not
exceed 20% of total
outstanding shares
of the company.
(Remain
unchanged)
Total shares held by
all QFII in one listed
company should not
exceed 30% of total
outstanding shares
of the company.
Source: CSRC
Table 4-3: Changes of Restrictions on RMB Financial Instruments
2002
RMB Financial
Instruments
1. Shares listed in
China's stock
exchanges
2. Treasuries listed in
China's stock
exchanges;
3. Convertible bonds
and enterprise bonds
listed in China's stock
exchanges;
4. Other financial
instruments as
approved by CSRC.
2006
2012
1. Treasuries listed in
China's stock
exchanges, which
including stares,
bonds and warranties.
2. Securities
investment funds
3. Convertible bonds
and enterprise bonds
listed in China's stock
exchanges;
4. IPO shares, SEO
shares, allotment
shares.
5. Other financial
instruments as
approved by CSRC.
1. Treasuries listed in
China's stock
exchanges, which
including stares,
bonds and warranties.
2. The fixed income
financial products
which traded in the
inter-bank bonds
market.
3. Securities
investment funds
4. Stock index futures
5. IPO shares, SEO
shares, allotment
shares.
6. Other financial
instruments as
approved by CSRC.
Source: CSRC
4.2.4 The Changes of Restrictions for Inward and Outward Capital Remittance
Remittance restrictions and lock-up period can make sure the foreign exchange-rate will
not fluctuate violently in short-term and maintain the forex at a certain level. In order to
maintain the nature of QFIIs’ capitals are long-term investments, SAFE sets up rigid
23
restrictions on inward and outward capital remittance. In 2002, the Provisional Measures
formulated that after getting quotas QFIIs need to remit principal inward in 3 months, and
the lock-up period is one year; and after the lock-up period, each outward remittance
cannot exceed 20% of principal and two outward remittances cannot happen within 3
months. Then, in the Measures of 2006, in order to attract more long-term investments like
pension funds, insurance funds, mutual funds, and others, it stated that the lock-up period
for aforesaid three kinds of funds lower to 3 months. And pervious lock-up period
restrictions did not change in 2012’s new Measures (CSRC).
From 2002 to 2012, it is clear that all kinds of investment restrictions eased gradually, and
the aim is to expend the size of QFII group and enable more and more institutional
investors invest in.
4.3 Openness and Current Conditions of Chinese Mainland’s Stock Market
4.3.1 Outcomes of QFIIs’ Participation in Chinese Mainland’s Stock Market
From the Figure 4-1 we can find that QFIIs had a positive capital gain in investing A-shares
market. In 2006, the aggregated approved quota was 10 billion US dollars, but the total
market capitalization held by QFIIs was 1.2 times larger than approved quotas. The
performance of QFIIs in 2007 was much better, the total market capitalization increased
dramatically to nearly 1.9 times of approved quota. The phenomenon of the market value
exceed the approved quota means that the prices of shares they hold increased
dramatically throughout those two years, and this great investment return can be partly
thanks to the bull market in A-shares market between 2006 and 2007, meanwhile QFII’s
excellent investment techniques cannot be ignored.
24
Figure 4-1
Source: China Capital Development Report by CSRC, 2008
4.3.2 Market Openness
After becoming an official member of WTO, the financial sector of China become more and
more open. The report of Xinhua-Dow Jones International Financial Centers Development
Index can act as good indicator for market openness, which ranks 45 financial centers in
terms of growth and development, industrial support, financial services and general
environment and provides information for international investors to find better places to
allocate their funds globally. In this report, there were five cities in China being selected,
they are Hong Kong (4th), Shanghai (8th), Beijing (13th), Shenzhen (22th) , Taipei (41th)
(IFCD, 2012). It can be seen that three financial centers in Chinese Mainland rank quite
high, and show a great potential to become next powerful international financial centers.
Moreover, according to the information of State Administration of Foreign Exchange (2013),
at the end of 2012, there were 169 QFIIs received the total quota which worth US $37.4
billion, in the future, there will be more QFIIs in A-shares market.
4.3.3 Current Conditions
Lack of effective market surveillance: financial markets always developed in an
eye-catching speed, however, a sharp contrast is that Chinese regulators lack sound
25
market surveillance capabilities. For instance, some financial corporations in western
countries tend to operate various businesses in a mixed way, which requires regulators to
have higher capability on monitoring and regulating. However, in Chinese Mainland there
are several regulatory bodies to regulate financial sector simultaneously, and the
separation of regulation may cause many problems, for instance, the ambiguous division of
duties and responsibilities between regulators may lead to supervision overlapping or
regulatory vacuum and leave many loopholes for speculators to extract abnormal interests.
According to the Interim Measures of QFII Domestic Securities Investment, CSRC
responsible for screening QFIIs and their operations, and SAFE responsible for approving
quota and principal inward and outward remittances. The initial purpose of this duty
separation is to reinforce surveillance, but in reality, CSRC do not have quota approval
authority, therefore, cannot regulate QFIIs who get quota but did not use it; on the other
hand, SAFE sometimes cannot distribute the quota to the right QFIIs who really need it
(CSRC, 2006). Therefore, regulators really need to communicate and coordinate more with
each other to supervise the whole market in an efficient way (IOSCO, 2012). The efforts
government put into market surveillance is that: China passed the amendments to the
Securities Law in 2006, which was initially promulgated in 1999, aims to strengthen the
investigations and sanctioning of market irregularities, reduce the investment risks and
protect investors’ rights and interests (CSRC). Besides, the amendment to the Securities
Law was an attempt to adjust new financial situations, and it lays a solid foundation for
capital market liberalization.
Lack of financial innovation: Another distinct feature in Chinese securities market is lacking
financial innovation. A well-functioning stock market need to equip enough financial
instruments for investors to diversify their investment portfolio and hedge their assets.
However, until 2013, the only derivative instrument QFII can hedge their investment is stock
index futures. Other more useful instruments like margin trading or short selling which is
common in well developed stock markets cannot be invested by most investors in Chinese
Mainland. In the future, introducing sound derivative products and hedging measurements
are needed, and meanwhile effective supervisory mechanism is indispensable.
26
In 2013, as for total market capitalization, A-shares market is the biggest one among
emerging economies, and possesses 2492 listed companies means Chinese stock markets
have enough liquidity and vitality. But in terms of Domestic Market Capitalization as a
percentage of GDP which is a crucial indicator for evaluating the importance of stock
market in a country’s economy, Taiwan exceeded Chinese Mainland for around three times.
From statistics we got from the World Federation of Exchanges, in 2010, the total domestic
market capitalization of Shanghai and Shenzhen was US $4,027.84 billion (WFE, 2013),
and the GDP of China in the same year is US $5,939.33 billion (NBSC, 2011), therefore,
the ratio of two indicators is 67.8%. For America, the solely total domestic market
capitalization of NASDAQ OMX and NYSE Euronext (US) is US $17,283.45 billion (WFE,
2013), and that year’s GDP of America is nearly US $15,000 billion, so, the proportion is
115%. Here we can see the gap. Shanghai and Shenzhen stock markets are not as
competent as those developed stock markets but the growth potential is immeasurable, for
Chinese economy is big enough with huge numbers of listed companies.
Figure 4-2: Market Capitalization of Several Emerging Economies’ Stock Markets
Source: IOSCO survey data and World Bank (IOSCO, 2012).
High turnover rate usually means too much individual investors involved in stock market
trading which cause the stock prices fluctuate frequently. Chinese Mainland’s turnover rate
reached nearly 170% in 2010, and was the highest among emerging economies. We can
infer that the size of institutional investors is not big enough to influence the whole market.
27
Figure 4-3: Turnover Rate of Several Emerging Economies’ Stock Markets
Source: IOSCO survey data and World Bank (IOSCO, 2012).
In sum, in this chapter, the economic and financial background for introducing QFII scheme
is analyzed and find that some preconditions of capital account liberalization such as
interest-rate and foreign exchange rate liberalization in Chinese Mainland is not achieved
before gradual capital account liberalization. Also, separation of trading-shares and
non-trading shares is a distinct feature of Chinese Mainland stock market. Moreover, three
Measures which related to the gradual QFII scheme deregulation are demonstrated, and
find that there is a clear pathway for easing the investment restrictions. In the final part, we
find that QFII is still a minority in A-shares market, and do not influence Chinese stock
market that much, but the existence of QFII do help regulators enhance their market
surveillance abilities and make the financial market better.
Chapter V: Comparison of Taiwan and Chinese Mainland QFII scheme
5.1 Similarities and Differences in Introducing Background
As for the introduction background of QFII scheme in Taiwan, there are two things worth to
note, the first one is interest-rate and foreign exchange-rate liberalization, and the second
one is industrial upgrading. Those two factors lay a solid foundation for smooth capital
account liberalization. Interest-rate and foreign exchange-rate liberalization is important
28
because they are effective resources allocator in financial market, and after liberalization
the pricing of financial asset can reflect real demand and supply of financial markets more
effective. More importantly, Taiwan’s economic structure upgrade policies help the take-off
of Taiwan’s electronic industries in the 1980s and transform traditional manufacturing
industries to high technology industries successfully. For instance, in 1980, Hsinchu
Science industries park was established, and later became the world third largest
semiconductor production base with more than 440 high technology companies and annul
turnover of new Taiwan $880 billion (Wang Hu, 2011).
Furthermore, after the industries upgrading, the traditional manufacturing industries took
only 15% of GDP instead of 45% before upgrading, however, machinery and electronics
companies elevated from 20% to 40%. Even through the appreciation of new Taiwan dollar
occurred later, the successful industries upgrading help to maintain the competitiveness of
Taiwan’s international trade and make sure the continued growth in Taiwan domestic
economy. During the take-off of Taiwan’s world renowned electronic industries, QFIIs’
investment helps a lot. QFII in Taiwan tends to buy shares of electronic companies, and
shares hold by QFII in these four companies: Taiwan Semiconductor Manufacturing
Company Limited (TSMC), United Microelectronics Corporation, Foxconn Group and ASUS
took nearly 51% of QFII total shareholding value, which means every single QFII invest
more than 50% of their money in those four high technology companies (CSRC, 2006). It
can be seen that the long-term capital supply promote the development of Taiwan high
technology industries.
In 2003, Chinese Mainland just became a member of WTO for two years and began to
liberalize the international trade. And Shanghai and Shenzhen stock markets were
established in 1990 and just traded for 13 years, many policies in those two exchanges had
the shadow of planned economy, especially non-trading shares policy. Originally, in order to
ensure the domination of state-owned economy, authorities designed a special equity
ownership structure for those state-owned listed companies, that is, only a small proportion
of companies’ shares are tradable and majority of shares are non-tradable. Later, it can be
find that share prices are distorted by this tradable shares and non-trading shares
separation policy. Therefore the introduction of QFII can be treated as an institutional
29
innovation and promote the development of Chinese stock market; also, QFII can help to
inject more capital into stock market to increase the liquidity, and absorb extra non-trading
shares which would be released by those state-owned listed companies.
The capital account liberalization process need to be implemented in certain sequence, and
it is crucial to bear in policymaker’s mind that fully open the capital account abruptly before
building up a sound institutional system is highly danger. The sound institutional system
includes strong market disciplines like good accounting practices, transparent legal system
and powerful supervisory and regulatory system to prevent insider trading, corruption or
other illegal conducts (Eichengreen & Mussa, 1998). Therefore, opening up gradually is a
good choice for those developing countries to buy time for building up a sound institutional
system to adjust rapid economic development. This is exactly what Taiwan and Chinese
Mainland did by implementing QFII scheme. As for Taiwan, the interest-rate and foreign
exchange-rate liberalization is achieved prior to stock market opening. But in Chinese
Mainland, capital account liberalization accompanied with the gradual opening process of
international trade, and the interest-rate and foreign exchange-rate are still controlled by
the government. This special situation means the opening process of stock market in China
will be longer and harder than Taiwan.
5.2 Similarities and Differences in Schemes Themselves
From the introduction of QFII scheme in 1991 to the abolishing of it in 2003, Taiwan spent
12 years in total and became one of the successful international stock markets in the end.
However, in Chinese Mainland, launched in 2002, QFII scheme has been implemented for
11 years, but seems like there is still a long way to go.
In the first place, the investment restrictions which were written in the first Provisional
Measures are stricter than Taiwan’s first QFII measures. As for qualifications, the
requirement in Chinese Mainland is that the value of securities under managing shall not be
less than US $10 billion for all kinds of institutional investors, but in Taiwan the restrictions
is no less than US $0.3 or 0.5 billion, and we can see the big gap in qualification criteria. As
for business operating years, insurance companies and securities companies need to
30
operate for over 30 years, but in Taiwan, just 10 years was required. In terms of inward and
outward capital remittance, restrictions in Chinese Mainland were stricter than Taiwan. The
lock-up period in Chinese Mainland was one year, and because of forex control, the capital
remittance need to acquire the permission of SAFE, but in Taiwan the lock-up period was
just three months. However, the common point is that both authorities in two jurisdictions
adopt compulsory measures rather than flexible measures like taxation to regulate QFIIs.
Chinese Mainland chose to implement very tight restrictions is not only to find long-term
investment fund but also concern for the weak supervisory abilities of relevant regulators,
but meanwhile, tight restrictions screen out many capable but small investment institutions.
As for QFII information disclosure mechanism, Taiwan had a complete QFII information
disclosure system and the public can get that information easily, but in Chinese Mainland,
only regulators can have access to that information. In Taiwan, some trading information
which related to QFII can be acquired through the website of Taiwan Stock Exchange. The
public information including: 1) the oversold and overbought conditions of all QFIIs for a
single company and all companies in the stock market; 2) shareholding conditions: how
many shares of a listed company were held by QFIIs and the shareholding percentages in
different industries which invested by the whole QFIIs. Taiwan stock exchange would renew
those statistics daily, weekly and monthly, but not disclose each QFII’s trading details. In
Chinese Mainland, the QFII information disclosure system is not established yet. From the
website of CSRC, only the list of approved QFIIs and the list of QFII custodian banks are
available. Shareholding conditions can only be acquired from listed companies’ annual
report. Comparing with Taiwan, Chinese Mainland’s QFII information disclosure is lacking
transparency.
Moreover, according to the research of CSRC (2006), Taiwan eased regulations frequently
and in a fast pace from 1991 to 2003. Taiwan changed investment quota restrictions
thirteen times, changed shareholding restrictions eight times, changed capital inflow and
outflow regulations nine times and investment fields eight times throughout those 12 years.
Every change is a fine tuning, but the total changes make a difference. As for Chinese
Mainland, the QFII domestic investment measures only changed three times, seems like
31
the road for deregulation is still very long.
5.3 Similarities and Differences in Effects of QFII Schemes on Stock Markets
Generally speaking, the introduction of QFII system can influence several aspects of stock
market such as liquidity injection, investor structure optimization, brining rational investment
philosophies, improving listed companies’ corporate governance and promoting institutional
innovation, and others. However, one thing clear is that economic environment is crucial
and same policies implemented in different environment may cause different outcomes.
5.3.1 Liquidity Injection
QFII helps to inject huge amount of long-term capitals into stock markets and listed
companies. From the Figure 5-1, we can compare the net QFII capital inflow in Taiwan and
Chinese Mainland and started from the year introduced QFII schemes in these two
jurisdictions. In the first two years, net capital inflow in Chinese Mainland was higher than
Taiwan. Then, from year 3 to year 6, net capital inflow in Taiwan maintained at US $2 billion,
while, in China, the net capital inflow fluctuate because of quota restrictions and forex
control. In year 7, Taiwan experienced Asia financial crisis in 1997, the QFII capital became
net outflow in that year. But after year 9, there was a great surge in net capital inflow in
Taiwan, because Taiwan relaxed the restrictions again in 1999 and MSCI decide to elevate
the weight of Taiwan index from 50% to 100%, which enabled a large volume of
international capital flow into Taiwan. The great surge happened in Chinese Mainland in
year 10, when CSRC introduced a new QFII investment Measures and relaxed restrictions
further, and also western countries formulated quantitative easing policies in the same year,
those two factors made the net capital inflow reached the highest peak. Thus, through
comparing, even through the amount of capital inflow is different but the overall upward
trend is quite similar: net capital inflow increased gradually as government eased
regulations on a step by step basis.
32
Figure 5-1
Net QFII capital inflow comparison
10
billion $
8
6
Net capital inflow in
Taiwan
Net capital inflow in
Chinese Mainland
4
2
0
-2
1
2
3
4
5
6
7
8
9
10
11
12
Time series,T=1 means the year introduced QFII
scheme(Taiwan in 1991, Chinese Mainland in
2003)
Source: SAFE and Taiwan Stock Exchange (Qibin & Ba Shusong, 2003).
5.3.2 Investor Structure Optimization and Promoting Rational Investment Philosophies
The presence of QFIIs in the A-shares market can expand the group size of institutional
investors. Actually, a mature stock market need to be dominated by institutional investors
rather than individual investors, because institutional investors have richer investment
experience in international markets, and they favor value investment and tend to hold their
equity portfolio in a long-term basis. Moreover, foreign institutional investors have
professional financial knowledge in acquiring and analyzing huge volume of information
and then reacting timely to buy low and sell high. Therefore, this asymmetric ability can
lead to the herd behavior among individual investors, that is to say, individual investors tend
to mimic the trading behavior of those institutional investors, especially those more capable
QFIIs (Lin & Chen, 2006). In other words, the presence of institutional investors not only
optimize the investors’ structures but also change individual investors’ investment
behaviors and made them to invest rationally.
From the Figure 5-2, it can be seen that the proportion of foreign institutional investors in
terms of trading volume is 18% in Chinese Taipei which is equal to the average ratio,
however, QFII only contribute 1% of trading volume in Chinese mainland. For the
proportion of domestic institutional investors, Chinese Taipei and Mainland are quite same,
14% and 13% respectively. But, generally, the individual investors still took a large part of
33
annual stock trading volume in Chinese Mainland, because of rigid restrictions, QFII cannot
change Chinese stock market’s individual investor dominated structure in short-term.
Figure 5-2: Share of Annual Stock Trading Volume in 2010
Source: IOSCO survey data.
From the chart, in Taiwan, we can find that domestic individual investors took a large part of
total trading value in Taiwan stock market at the time introducing QFII program. Then, with
the gradual easing of the QFII scheme, both foreign and domestic institutional investors
increased steadily and squeeze the percentages of individual investors. At the end of QFII
scheme, foreign institutional investors took nearly 5.9% of total investors in Taiwan stock
market. We can find that QFII do optimize the investor structure for Taiwan stock market.
Figure 5-3
Source: Tan Xiaofen. (2003)
34
5.3.3 Improving Listed Companies’ Corporate Governance
QFIIs in emerging markets favor the companies which have a reasonable corporate
governance structure and a good record information disclosure history, because as
freshmen in a new investment environment they need to adjust for a while and invest in
companies with good corporate governance and real investment potentials to lower risks
they may exposure. Therefore, those companies which want to get the long-term capital
injection would release more about themselves to show the real value and real potentials to
attract the attentions of QFII. The positive side will be that those listed companies through
sufficient information disclosure can get more long-term lower cost operating capital from
QFIIs. Finally, this can facilitate to cultivate a virtuous circle to improve the whole
environment of stock markets.
In Taiwan, because the shareholding cap was eased gradually, except some special
industries, QFII can buy more than 50% of a company’s common shares, therefore, QFII
can enter into some companies’ board of directors, and influence companies’ corporate
governance directly. However, in Chinese Mainland, the shareholding cap for single QFII is
10%, thus, QFII can only influence corporate governance of listed companies indirectly.
5.3.4 Promoting Institutional Innovation
Actually, there are so many restrictions for foreign investors at the time introducing QFII
scheme, and the size of fund determined that the impact of QFIIs to the whole stock market
is quite small. Therefore, the significance of this kind of scheme is to promote institutional
creativity at the very beginning. Also, emerging economies’ stock markets are immature at
first, and immature means uncertainty and risk for foreign investors, so QFII tend to wait
and take some researches before entering into those markets. So, that is a reason why
there were few investors applied for quotas at the time introduced QFII program.
What is more, another important point of this scheme is that QFII may push the local
authorities to enhance their market monitoring abilities to meet international standards. A
developed stock market is supervised by an experienced regulatory team rather than ruling
35
by many restrictions. The presence of QFII may teach regulators how to supervise
international investors and improve their regulatory skills. Also, in a mature stock market, a
lot of investment instruments can be invested which comprise various financial derivatives
for investors to hedge their investments. The introducing of foreign investors can force
regulators to develop innovative investment instruments to modernize stock market.
As for Chinese Mainland’s stock market, there were many financial innovation reforms in
the past ten years. In 2005, non-tradable shares reform made huge volume of shares
injected into stock market and enabled the share prices reflect the real value of company.
Moreover, in 2010, margin trading was experimented among several securities companies,
and also the Hushen-300 index futures as the first financial futures product launched in the
same year in Chinese Mainland. In Taiwan, the increasing number of QFIIs also forced
local authorities to innovate. In 21st July 1998, Taiwan futures exchange launched Taiwan’s
weighted index futures. One year later, in 1999, Taiwan introduced electronic companies’
stock index futures and financial companies’ stock index futures because shares of those
two kinds of companies are largely held by QFII (Chen, 2007). Thereafter, other financial
futures and options introduced in a fast speed, and those new investment instruments do
make stock market become more active.
5.3.5 Stabilizing Stock Market
Firstly, the existence of QFII strengthen the stability and reduce the volatility of stock market,
for they emphasizing more on long-term investment, and they do not trade shares in large
volume frequently. For example, during 1997 Asia Financial Crisis, a lot of QFIIs stick to
long-term investment strategies and did not disturb the market through aggressive moves,
and help Taiwan went through difficulties. Moreover, through observing the changes of
turnover rate in Taiwan stock market, we can find that there is a downward trend for
turnover rate after introducing QFII scheme. It is clear from Figure 5-4 that the turnover rate
reached over 500% at 1990 and then because of the existence of QFIIs, the turnover rate
appeared a downward trend through observing the 5-year moving averages’ line.
36
Figure 5-4: The Changes of Turnover Rate in Taiwan Stock Market
Source: Taiwan’s Securities and Futures Commission (Qibin & Ba Shusong, 2003).
1600
1400
1200
1000
800
600
400
200
0
Shanghai
Shenzhen
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
%
Figure 5-5: The Changes of Turnover Rate in Chinese Mainland Stock Market
years
Source: 2012 Statistical Annual of Chinese Securities and Futures Market (CSRC, 2013)
In Chinese Mainland, QFII only took 1% of Chinese stock market, so the influence of
institutional investor is quite small. From the Figure 5-5, we can find that comparing with
Taiwan, the turnover rate did not show a downward trend after introducing QFII scheme,
instead that the turnover rate peaked at 900% in Shanghai and Shenzhen in 2007. Also, in
terms of fluctuation range, obviously, the turnover rate wave more violent than Taiwan,
which means individual investors are still main stream in Chinese stock market. There is
downward trend for turnover rate after 2009, one explainable reason is that bear market
lock up retail investors’ money and they are waiting for the next stock market boom.
37
5.3.6 Lowering the PE ratio of Listed Companies.
When Taiwan implements the QFII scheme and promote the capital internalization, the PE
ratios of Taiwan stock market became lower and lower, for the increasing of earnings per
share. The reason behind it is that the QFIIs invest more in high growth potential high-tech
companies, and the long-term capital supply enable the companies implement the best
long-term strategies which eventually result in better business operation and earning more
profits. From Figure 5-6, in October 1995, Taiwan’s PE ratio was the highest among four
stock markets, but after 2003, the PE ratios of four stock markets are almost stood at the
same level. This means Taiwan stock market becomes more mature after choosing
opening up the capital account.
Figure 5-6①
Source: Citic Securities Research Institute, QFII and Internationalization of Taiwan Stock Market (2004)
(Hou Peipei, 2009).
①
TWSE stands for Taiwan Stock Exchange weighted index.
SPX stands for Standard &Poor's 500 index.
HSI stands for Hong Kong Hang Seng Index.
SX5P stands for Dow Jones STOXX 50 index.
38
Figure 5-7: Changes of PE Ratio in Chinese Mainland’s Stock Markets
Source: 2012 statistical annual of Chinese securities and futures market (CSRC, 2013)
From Figure 5-7, similar with the fluctuation of turnover rate, the PE ratio also waved
violently after the time introduced QFII scheme. Especially in 2007, PE ratio peaked at 60 in
Shanghai and 70 in Shenzhen, and it shows an irrational equity investment behavior
among individual investors. Comparing with Taiwan where PE ratio stood at 20 after 2003,
Chinese Mainland’ s stock markets’ PE ratio was still too high even through there was a
downward trend after 2009, and obviously, it was not the contribution of QFII and largely
thanks to the bear market. In the future, if the group of QFII become large enough to affect
the whole A-share market, PE ratio will go down to a reasonable level.
5.3.7 Improving the Correlation with Other International Markets
International stock markets usually go ups and downs simultaneously around the world,
and this phenomenon often stands for the strong correlations between those markets.
According to the research of Pan Wenrong (2010), the correlation between Chinese stock
markets and other international stock markets shows an upward trend after introducing the
QFII program. Also, Chinese stock market began to show exogeneity，that is to say, the
changes of other international markets may have a small effect on Chinese stock market.
So, it can be predicted that the impact will be larger when the capital market become more
internationalized. But because the capital account control is still too tight, A-share stock
index still cannot enter into international indices like MSCI or FTSE.
39
In Taiwan, the progress of securities market internationalization closely accompanied with
the process of deregulation. In 1996, when Taiwan relaxed the QFII restrictions again,
Morgan Stanley Capital International Index (MSCI) decided to include Taiwan stock index
into its indices and Financial Times and Stock Exchange Index (FTSE) did the same thing
in 2000. This can be viewed as a cornerstone for the internationalization process of a
emerging market. This is an important turning point for Taiwan stock market because a lot
of institutional investors around world would refer to those international indices to allocate
their assets globally. In America, nearly 90% of institutional investors invest passively
according to those indices. If one market does not included in those indices, it is difficult to
pool a lot of money. In addition, the related researches find that the Taiwan stock market
has weak correlation with other international markets at the beginning period of QFII
implementation, but in 2001, the correlation coefficient between Taiwan and New York stock
exchange became 0.682, and between London stock exchange was 0.785, which means
Taiwan stock market had more positive correlations with other markets(Lu, Xiaozhen，
2006).
All in all, QFII scheme influences Taiwan and Chinese Mainland in various aspects, and
shape stock markets in a positive way. At the end of QFII scheme, foreign institutional
investors took nearly 5.9% of total stock market investors and made Taiwan stock market
more mature and international. In China, QFII took only 1% of total stock market investors,
but the influence of QFII on the stock markets will be larger and larger with the gradual
easing of relevant regulations.
Chapter VI: Conclusion
From Taiwan’s experience Chinese Mainland can learn a lot. Many details in Chinese
Mainland’s Measures on Administration of Domestic Securities Investments of QFII are
learned from Taiwan. However, as the second largest economies in world, the opening
pace of capital market cannot be as fast as Taiwan, because the macroeconomic conditions
40
like the size of foreign exchange reserves, the regulations of interest-rate and foreign
exchange-rate, and exchange controls are all different between Taiwan and Chinese
Mainland.
In the process of Taiwan capital account liberalization, there are two important things:
foreign exchange rate liberalization and industry upgrading contribute a lot. Even through
after the foreign exchange rate liberalization, huge amount of capital flow inward Taiwan
and appreciate new Taiwan dollars but the export did not hurt much, because high
value-added products like high technology electronic devices and equipments took a large
part of its exportation value, and positive effects of financial reform outweigh negative
effects. In Chinese Mainland, these two factors: foreign exchange rate liberalization and
industrial upgrading also determinate the pace of capital account liberalization. As for
export, labor-intensive and low value-added products still take a large part, sometimes;
lower price is the only thing China can compete with other countries. However, in those
years, the pressure on renminbi appreciation become more and more big, and quick
renminbi appreciation lead the price advantage products and high price elasticity products
loss their competitions in the world. Therefore, the foreign exchange-rate is still need to
control to lower the speed of renminbi appreciation and protect the export.
Nonetheless, changing the way of exportation growth depends on the restructuring of the
whole economy and industry upgrading which need long-term efforts input and cannot be
achieved in just several years. As for industrial upgrading, merely technology development
is not enough, instead that establishing a new business environment is needed. In China,
starting a new business is harder than other countries, for one thing, the government
always set tight restrictions on companies and levy various taxes and extra charges to put
huge burdens on small and medium sized companies’ shoulders; for another, the financing
channels are limited, so many excellent small and medium sized companies in Chinese
Mainland are eliminated from the market because they cannot borrow enough money to
develop. The whole society is depend too much on indirect financing like bank loan and the
direct financing channel like growth enterprise stock market is still far away from many
small and medium sized companies. From this perspective, the ineffective financial system
41
make the industrial upgrading developed at a slow pace and the immature stock market did
not help real economy too much. Therefore, in short-term, the growth of Chinese economy
is still largely depending on exportation, and Chinese government need to buy time for
domestic economic restructuring through foreign exchange-rate control.
However, foreign exchange-rate control itself is not a good long-term policy to stick to,
because the renminbi is highly undervalued, and the huge foreign exchange reserves can
show that the demand for renminbi is really big. In this situation, People’s Bank of China
would use quantitive easing to cope with the stress of renminbi appreciation but at cost of
inflation. In the long-run, if too much money was printed, the whole financial system may
collapse. Actually, if the capital account liberalizes more and the quota of QFII increased for
over nine or ten times, the complete flotation of foreign exchange-rate is inevitable,
otherwise, the whole economy will be damaged. Actually, the capital account liberalization
itself is unavoidable, since hot money can flow inward and outward China through
overpricing and underpricing in international trade.
Therefore, after conducting research into Chinese Mainland and Taiwan QFII scheme, two
results can be concluded: a) the capital account liberalization will be realized and QFII
scheme in Chinese Mainland will be deregulated and abolished in the future, and Chinese
stock market will become more and more mature after more QFIIs invest in Chinese stock
market; b) the speed of capital account liberalization will not be as quick as Taiwan,
because opening the capital account is to help the development of real economy, so, taking
the whole macroeconomic conditions into consideration is needed when implementing
some policies. In Chinese Mainland, those two macroeconomic factors are foreign
exchange-rate liberalization and industrial upgrading. Fully capital account liberalization
can be achieved after achieving foreign exchange-rate liberalization and successful
industrial upgrading.
All in all, Chinese Mainland learns a lot from Taiwan’s QFII measures, but for two QFII
programs implemented in different macroeconomic environment, it is unpractical for
Chinese Mainland to open the stock market as quick as Taiwan, because the whole fragile
42
economy and financial system in Chinese Mainland did not ready for the complete opening
of capital account.
6.1 Limitations of Study
One limitation is that this thesis concludes the deregulation process of Chinese Mainland’s
QFII scheme will be longer than Taiwan, and mainly depend on two factors: foreign
exchange rate liberalization and industrial upgrading, but thesis does not research deeply
into those two factors and giving the exact timetable of capital account liberalization. Thus,
further studies can be done in predicting the timetable of capital account liberalization
through researching into those two factors.
Another limitation is that this thesis is mainly using secondary data and other people’s
researches results to support arguments. Also, too much outdated statistics are used in this
thesis, and some of them can be renewed if latest database is available.
43
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Appendixes
[If your project includes appendixes, please write them here.]
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（封底）
指导教师评语 Comments of Supervisor
建议评定成绩 Suggested thesis score by supervisor：________________
指导教师签字 Signature of Supervisor：___________________
学院答辩机构意见
日期 Date：______________________
Comments of Institute Oral Defense Committee
答辩组编号 No.______ Defense Group
答辩组主席签字 Signature of Chairman, Defense Group_________________ 日期 Date_____________
46