A peek hole to an open door for Foriegn giants(QFII) Ever since the Chinese regime embarked upon the

path of state capitalism,it has been emphatic in attracting foriegn investors to pour their "strong currencies" into their markets through Special E conomic Zones(SEZ).This was just a starting point for a journey that would see more than 600 million people pushed out of pr operty in a time span of just 30 years;the greatest economic and political achievement of our times.But the Chinese governm ent was wrong in its assessment that it could do it alone through State owned Enterprises and encouraged the private sector during 1980s.These were the first steps of China towards market economy where stocks can never be left behin d.

The People's Republic of China has two stock exchanges. The larger, primary stoc k market is the Shanghai Stock Exchange. Its trading volume and market capitalization overshadows that of Shenzhen Stock Exchange, the second stock market in mainland China. Both stock exchanges operate as nonprofit organizations. The China Securities Regulatory Commission (CSRC) sets policies and oversees their activities. The first stock exchange in China started operating during the nineteenth centur y. By the 1920's the Shanghai Stock Exchange had become the primary stock market, after a series of mergers with oth er Chinese stock exchanges. The Communist revolution in China forced the Shanghai Stock Exchange to cease al l operations in 1949. It reestablished operations at the end of 1990. Foreign Shares can buy B-shares listed in US dollars in Shanghai Stock Exchange and Hong-Kong dollars in Shenzhen Stock Exchange.These shares can only be purchased in lots of 100 and odd lots ca n be sold during particular trading hours but can never be purchased.The CSRC also permits ADRs(American Depository Receipts) which allows certain companies to float their shares in dollar denominated bonds. Shares A Shares 895-shanghai

473-shenzhen 1,368 B Shares 54 54 108 Small and Medium Enterprise Board 0 531 531 ChiNext 0 153 153 Bonds 505 191 696 Investment Funds 13 93 106 A-shares are quoted in renminbi and were available only to Chinese mainland citi zens until 2002.Below is a breakup of Chinese equity market by market capitalisation. Shanghai--2904 billion us dollars Shenzhen--1336 Hong Kong-2751 QFII stands for Qualified Foreign Institutional Investors. The QFII Program is t he certification system which allows licensed professional foreign investors to tra de Ren Min Bi (RMB) denominated securities in China's mainland stock exchanges by convertin g foreign currency to RMB within the quota obtained from relevant authorities. By 2001, the Chinese securities market had already developed into one of the most vibrant securities markets in the Asia-Pacific. However, because the pr oportion of institutional investors in the Chinese securities market was far behind that of the level of developed markets at that time, which seriously restricted the development of the capital market in China, the QFII Program was introduced. On 5th November 2002, the Provision on Foreign Exchange Administration of Domesti c Securities Investment by Qualified Foreign Institutional Investors was introduced . The total investment quota available for the QFII Program was USD 10 billion in tota l initially, and was increased to USD 30 billion in 2007. In recent years, foreign institutio nal investors have increased their demands in investing in China s capital market due

to the continuous growth of China s economy and capital market. Since the implementation of the QFII Program, it has been operating smoothly. Due to the long-term investmen t strategy of those institutional investors in QFII accounts, the strategies enric h the investment structure of the domestic capital market,which heavily relies on speculative real estate market and bank deposits Overview of QFII By June 2012, 172 foreign institutions were granted QFII licenses, which include 23 commercial banks, 13 securities companies, 96 asset management companies, 11 insurance companies, and 29 other institutions (endowment funds and sovereign funds). From a geographical point of view, those foreign institutional investors come from 24 countries and areas, among which, 83 in East Asia, 52 in Europe, 34 in North America, 2 in Australia and 1 in Africa. China had approved 147 QFIIs by 15th June 2012 with a total investment quota of USD 27.363 billion. The total assets of QFII accounts has reached RMB 265.6 billion, of which 74.5% is stocks, 13.7% is bonds, and 9.6% is bank deposits. 11 commercial banks, including seven domestic banks, have RMB 105.2 billion assets under custody for the QFIIs. And 22 domestic securities companies act as the securities brokers for the QFIIs. Export charts from the pdf of country wise break up and quota Becoming licensed as a QFII and commencing investment activities entails four basic steps, and requires close cooperation with whatever PRC bank the QFII will use to custody its assets held in China in connection with its QFII investment activities. First, the applicant must submit an application and related documentation seeking the approval ofthe CSRC. Second, the applicant mus t, within one year from the date of receipt of the QFII license, apply through its PRC custodian bank to the SAFE(State Administration for Foreign Exchange) for an investment quota.U pon obtaining the

approvals from the CSRC and the SAFE, the QFII should submit an account opening form from the Peoples Bank OF China for the purpose of opening an RMB cash account. Finally, the applicant needs to apply to the China Securities Depository and Clearing Corporation, China s central securities depository, in Shanghai or Shenzhen for an investor code with respect to the relevant exchanges. QFII accounts are subject to significant restrictions regarding currency remittance into, and currency repatriation from, the PRC. QFIIs generally must, within six months of having each investment quota approved, remit the investment principal into China, and may not commence investment operations until remittance of the entire quota or expiry of the period for remittance. A failure to remit the entirety of the investment quota within this timeframe will result in forfeiture of the unremitted portion of the quota unless an additional quota approval has been granted. The QFII regulatory regime also imposes significant restraints upon repatriation of assets from the PRC. After remittance of the QFII investment quota, a QFII s assets are lockedup in China for a definite period of time and may not be repatriated from China. Once the

initial lock-up period is over, QFIIs generally may repatriate assets no more frequently than once a month in an amount no greater than 20% of its PRC assets as of the end of the past year, and repatriation generally results in forfeiture of an equivalent amount of the QFII investment quota. Additionally, a QFII s investment quota may become invalid under specific circumstances, and may be reduced or even cancelled by SAFE. A QFII may not apply for a quota increase until at least one year has passed since its last application for an investment quota was approved. Export the process chart from pdf Conclusion Continued and accelerating growth of foreign institutional investor participation in the Chinese securities markets is likely. The Chinese securities markets stand apart from most other securities markets about 95 percent of A-share investors are individuals, and 80 percent of market volume is attributable to individual investor transactions. China s equity market boasts a capitalization of around U.S.$3.67 trillion or rmb 23 trillion ;79 percent of which is floatable with around 2,500 stocks at 2012 year-end.1 The Price/Earnings ratios at the Shanghai and Shenzhen exchanges were 12.3 and 22, respectively, at 2012 year-end.2 In terms of actual investment, QFII funds traditionally implement a relatively s table and high equity allocation strategy unlike an average Chinese investor. Under no rmal circumstances, QFII positions

are maintained at levels of 70 to 90 percent in A Shares. With regard to actual investment performance, QFIIs in general underperformed as a whole though at the same time. The average annual return on QFII funds for the past 4 years was 124 percent, -65 percent, 78 percent and -11 percent respectively, compared to 163 percent, -64 percent, 103 percent, -4 perc ent for the benchmark FTSE China A All-Share Index over the same period.(draw a char t) Though QFII holdings still only account for less than 2 percent of total stock market holdings, their influence far outweighs their relative size. They are watched closely by many domestic investo rs due to the depth of their fundamental research and relatively sophisticated approach to risk management and selection.