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No other single policy move, following China's World Trade Organization accession last year, seems to have prompted such quick and vociferous responses from financial circles, home and abroad.
And ordinary Chinese are still nudging one another about the meaning of QFII, an abstruse abbreviation that has constantly hit the headlines in the past month.
No wonder - the qualified foreign institutional investors (QFII) scheme, described as a "milestone" move by many financiers, has opened up Chinese mainland's US$500 billion A-share market, an increasingly vital platform for its economic reforms, to foreigners.
Before potential QFIIs could air their views, banks were already scrambling for the lucrative trustee's role, clamoring about their own strengths to nurture the future QFIIs' capital.
One of the earliest responses came from Standard Chartered, which expressed a clear interest on November 8, the very next day after the government unveiled the reform to allow foreigners to trade A shares, Treasury bonds and corporate bonds through QFIIs.
The largest domestic commercial bank, the Industrial and Commercial Bank of China, spoke up later, enumerating the advantages of local banks - a rarely seen prompt response to policy change -in a report issued by its Shanghai branch.
But the scope is far bigger than either of the two banking giants and the outcome as yet unknown - the four State-owned commercial banks, a couple of joint-stock local banks, and some 20 foreign banks operating in China, are all eligible to become trustee candidates - although QFIIs are widely believed to favour a foreign trust bank.
Struggling domestic securities firms were cheered, too, looking forward to securing an agency's role for QFIIs that cannot trade on their own, and expecting anxiously a pick-up in market turnover to revive sagging commissions. Further, the reform would "catalyze the survival of the fittest (among securities firms), and improve their responsiveness," says UBS Warburg Asia Limited's China chief representative Yang Kai.
Yet frustratingly, the majority of QFII eligibles, the protagonists of the game, seem not to be as overjoyed, according to major investment banks. One week after the announcement, Goldman Sachs (Asia) L.L.C.'s Managing Director Fred Hu said more than 90 per cent of the big-name international investors he had consulted expressed no intention of entering the market any time soon. A few days later, UBS Warburg said the 50 fund managers it polled were opting for a wait-and-see stance, although "they are very much interested."
"The perceived absence of adequate corporate governance is the major concern among fund managers, although rich valuations of Chinese mainland companies is another factor," says UBS Warburg's head of China Research, Joe Zhang. Other concerns include the poor overall quality of A-share companies and inadequate transparency. And index-gazing fund managers are particularly eager to see a well-deserved rise of China weighting by Morgan Stanley Capital International in its benchmark indices, from a meagre 5 per cent currently.
Furthermore, international investors are grousing about the QFII rules, which Goldman's Hu said are "unnecessarily stringent" and "a pity," compared to the successful experiences in South Korea and China's Taiwan Province. Accumulated inward remittance was less than US$900 million for the first two years after a similar QFII debut in Taiwan in 1991, according to Credit Suisse First Boston (CSFB), and QFII investment had largely remained below 15 per cent of total market turnover on the island's bourse.
What foreign investors have found to be especially restrictive, is the three-year stay clause regarding the investment principal (three months in Taiwan's case), and the 70 per cent stock holding requirement (Taiwan moved quickly from 70 per cent to 30 per cent). All of those, they say, are proof that the impact of QFIIs is unlikely to be catastrophic.
"International investors, having done their homework, will tend to invest for the long term since it is not economically rational to trade a market with which they are relatively unfamiliar," says Rodney Ward, Asia chairman of UBS Warburg.
But with the debris of the Asian financial crisis not far behind, the regulators' prudence is well understandable, and arguably necessary, especially in a populous country like China. Chairman of the China Securities Regulatory Commission (CSRC) Zhou Xiaochuan made it clear, during a QFII seminar prior to the move: "China is a big nation and has to be responsible for its 1.3 billion people."
It is also a matter of choice and strategy. While many remain on the sidelines, some waltzed right to the front. "CSFB will be at the front of the line in seeking QFII status," the company's Asia-Pacific Chairman Paul Calello said late last month. UBS Warburg's Yang put it more bluntly: "It's such a huge opportunity that it's a waste if you don't put in your own money (besides the assets the bank manages)." And CSRC's Zhou also commented late last month that "many foreign financial institutions had expressed great interest" and were already contacting his commission. The QFII rules came into effect yesterday.
Consider the country's trillions in personal savings, they far outpace its economic growth and it's easier to understand some foreign institutional investors' scepticism. But it is far from encouraging to see the guests, not even just some of them, baulk at your invitation. It is unclear to what extent the policymakers had expected how the market would react - major share indices fell in the days following the announcement, defying expectations that the market would rise on liquidity prospects.
One week after the announcement, the CSRC convened a meeting which included three global investment banks, to collect feedback, but "mostly they were just listening," recalls UBS Warburg's Yang.
What is clear however, is that the move signals China's unwavering commitment to market reform and set in motion an as yet unknown agenda for its capital account liberalization process. The country still maintains tight controls on cross-border capital flows, which Goldman Sachs's Hu said are costly, corruption-breeding, and most importantly, ineffective in fending off a real crisis. "QFII broke through the forbidden area," he remarked.
It is also not in doubt that the reform represents a long-term blessing for the Chinese mainland's stock market, bringing as it does a strong stimulus for improving corporate governance, ushering in a more rational investment philosophy, and fostering a closer correlation with the world market. Retail investors' capital in Taiwan Province dropped to 84 per cent of the total market turnover last year from 1991's 97 per cent, and its average price-to-earnings ratio more than halved to levels close to its peers in London and New York, from 32 times in 1991, notes United Securities analyst Tang Zhi.
Even today, some argue that the mainland's more than 1,200 A-share companies offer some room, if not too much, for would-be QFIIs to prosper, or even find some hugely profitable stocks.
"We recommend that they focus on four categories," says UBS Warburg's Joe Zhang, namely "naturally monopolistic" firms that are not the result of government support, like power plants, firms with irreplicable Chinese uniqueness like the distiller Wuliangye, famous brand names like the Haier Group, and natural resource-backed businesses.
That room is poised to develop rapidly, given the widespread optimism about the capitalization outlook for the market in the coming years.
Many expect a three-to-five year "incubation period" before the mainland's QFII can deliver on its promise, as was the case in Taiwan, but it remains a possibility that the wait may be shorter, should regulators gain full assurance from the market and act swiftly. In CSRC's Zhou's words: "It is most important that we set up a mechanism and see if it will go smoothly and successfully. If it will, we will then make greater strides."
(China Daily December 2, 2002)
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