China’s Removal of QFII & RQFII Caps Will Not Impact FX Market

September 23, 2019
China’s Removal of QFII & RQFII Caps Will Not Impact FX Market September 23, 2019 Emma Rodgers

Foreign investors who wanted to pump money into China were earlier limited by the qualified foreign institutional investors (QFII) scheme and the renminbi qualified foreign institutional investor (RQFII) program. These two restrictions turned out to be a big hurdle in bringing in foreign investment to China and this is why Beijing decided recently to drop both these caps.

While it appears to be a positive move on the surface for the foreign investment market in China, market analysts are no so positive stating that this decision by Beijing will not make much of a difference in the FX market.

Unrestricted Access

The scrapping of the quota limits for these two programs will give investors full access to China’s capital market, which is the second-largest market in the world. The decision is more symbolic in nature because market analysts say that both equity and bond investors already use alternate means of investing in China. In truth, many investors avoided the QFII and RQFII programs for other reasons than the quota. A favorite of foreign investors is the use of stock connect schemes. This allows them to buy and sell equities in both Shanghai and Shenzhen without worrying about any restrictions. 

The current QFII program allows foreign fund investors to invest into yuan-denominated A shares while the RQFII program allows offshore yuan to buy stocks traded in the mainland. They have earned quite a bit. QFII investments as of September reached a total of $111.3 billion for this year. This is only 37 percent of the total quota of $300 billion. RFQII investment is at 693.3 billion yuan, also notably lower than the 1.99 trillion yuan quota.

The QFII program was started in 2002 as a way to fulfill China’s conditions of joining the World Trade Organization back in 2001. In 2011, the RQFII was also introduced. The growth of both programs was pretty slow, even with high profile names like UBS, Nomura, Morgan Stanley and Citi being part of the customer list. This was because of the strict rules that governed their operations. These were relaxed gradually but there are still problems with the schemes like submitting info to the Chinese tax authority before transferring funds offshore, though they are exempt from paying taxes.

Trade War Effects

Beijing has relaxed a number of restrictions in recent times as its trade war with the United States heats up. The two countries have been imposing tariffs against each other for two years now.

Beijing opening up is actually in China’s benefit as analysts say that it could potentially bring in billions of dollars a month as stocks and bonds encourage large inflows into the Chinese market.


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