So Bloomberg substantiated a claim that China will up its QFII quota to $30 billion from around $10 billion. QFII, the qualified foreign institutional investor program, is a state sanctioned scheme that allows overseas investment in Yuan-denominated equity and fixed income products since 2003; around 48 financial institutions currently participate in this program.
However, this statement isn't new. As early as the end of August, reports came out that suggested the government was on the move. Institutional investors account for 31% of all tradable value in China's A-share market, a 25% increase from 2004.
Yet this figure is amazing. Most of the volatility seen in the equity market recently is due to institutional investment. Most of the skyrocketing multiples seen in Chinese stocks is due to institutional investment. Inflation is rising due to institutional investment. Heck, we can blame everything on institutional investment. So how does the government justify increasing its domestic reserve ratio if it plans on increasing QFII by three-folds?
Perhaps this serves as a sort of "control" in the market, as foreign professionals take control and market make in Chinese equity markets, teaching Chinese people what and what not to invest in. But seriously, no one needs schooling. If the Shanghainese want to invest in A-shares, let them. It's better than channeling funds out of China and into Hong Kong through QDII (qualified domestic institutional investor program), where H-shares are significantly cheaper than A-shares, leaving room for yet again skyrocketing multiples and creeping inflation.
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