Walter Hutchens’ Blog

Here is a curious thing. The Provisional QFII Regulations (合格境外机构投资者境内证券投资管理暂行办法, Hege jingwai jigou touzizhe jingnei zhengquan touzi guanli zanxing banfa) issued by the CSRC and PBOC back on November 8, 2002 (available here in Chinese) provide:

第十八条　合格投资者在经批准的投资额度内,可以投资下列人民币金融工具:
　　(一)在证券交易所挂牌交易的除境内上市外资股以外的股票;
　　(二)在证券交易所挂牌交易的国债;
　　(三)在证券交易所挂牌交易的可转换债券和企业债券;
　　(四)中国证监会批准的其他金融工具。

Article 18
QFIIs may within their approved investment quota invest in the following RMB financial instruments:
1) stocks listed and traded on stock exchanges other than domestically listed shares denominated in foreign-currency [i.e., B shares];
2) [PRC] Treasury Bonds listed and traded on stock exchanges;
3) Convertible bonds and corporate bonds listed and traded on stock exchanges;
4) Other financial instruments approved by the CSRC.

However, subsequent regulations narrow the scope of permitted QFII investments. These rules promulgated on December 1, 2002 by the Shanghai Securities Exchange and these identical rules promulgated on the same day by the Shenzhen Stock Exchange provide:

第十四条因技术原因,合格投资者暂不能参与国债回购和企业债券的交易。

Article 14
For technical reasons, QFIIs cannot, for now, participate in trading Treasury Bond repurchases or corporate bonds.

It is not clear what “technical reasons” would prevent QFIIs from buying listed bonds. It is also interesting that the scope of QFII investments has been restricted through exchange-level regulations. My impression is that China’s stock exchanges are not self-regulatory organizations in any meaningful sense. For example, the Shenzhen and Shanghai stock exchange have identical rules on QFII trading. In general the exchanges do not compete with each other by creating their own listing standards to attract better quality issuers or greater numbers of issuers. Rather, the two exchanges have joint listing rules which are approved by the CSRC. Indeed, the The CSRC signs off on the heads of the two exchanges, and they often have CSRC ties. So I can’t help but wonder if such a regulatory move as this one concerning QFIIs reflects exchange policy or CSRC policy implemented through the exchanges.

And why have this policy?