China's QDII, QFII Rules to Come Out Soon
China's new set of rules governing investment and currency
exchange in China's domestic and overseas markets will
be announced soon.
QFII, or Qualified Foreign Institutional
Investor, is a set of regulations designed to
regulate foreign exchange investment in China's domestic
stock markets in Shenzhen and Shanghai. Under this system,
approved foreign institutions would be allowed to send
money to China, where it would be changed to RMB, China's
local currency, and then invested in the local stock market
through designated accounts which would need to comply
with certain finance and banking regulations.
QDII, or Qualified Domestic
Institional Investor, is the opposite, and allows
Chinese citizens to exchange their money from RMB, to
a designated foreign currency, so that they can invest
in a foreign stock exchange. It is estimated that at the
end of March, Chinese companies were holding approximately
$150 billion in US dollars, and the country's US dollar
reserves were estimated at $316 billion. It is believed
that these regulations will help China to put its foreign
exchange currency reserves to more efficient use.
For China, the benefit of the QFII and QDII systems are
that they act as a buffer mechanism for flows of money
in and out of China as the country moves toward an internationally
integrated financial system. This model has been often
used by developing countries and regions; a similar system
was introduced in Taiwan during the early nineties when
that region liberalized its economy. There is a consensus
that China needs to be better integrated into the world
economy, but at the same time, it is important to avoid
the wild currency swings found during the Asian financial
crisis of 1997, for example. During that crisis, the Thai
bhat, Malaysian ringgit and Korean won all lost a significant
portion of their value.
Hong Kong stands to benefit from the QDII regulations
as many Chinese investors will invest some of their savings
in the Hong Kong Stock Exchange. In the late nineties,
many Chinese companies chose to list on the HKSE. Hong
Kong also set up another board modeled on NASDAQ for hi-tech
companies in early 2000. Many of the companies listed
there have since closed or been delisted.
Hong Kong's economy has been badly hit as China has opened
to direct foreign investment. Real estate prices, for
example, have fallen 60% since their peak in 1997.
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