'Mini-QFII' program in works

A man reads a newspaper at a brokerage in Shanghai. [Xu Xiaolin / For China Daily]

BEIJING - China's plan to allow yuan deposits held offshore to be channeled into the mainland's equities market will help shore up market liquidity, but it can hardly be an immediate market saver given the limited size of the initial capital pool, analysts said.

China may soon launch a pilot program, dubbed the "mini-QFII (qualified foreign institutional investors)", which will allow overseas institutional investors to facilitate investments of offshore yuan deposits back into mainland capital markets, local media reported recently.

A slew of subsidiaries of mainland brokerage and fund houses in Hong Kong are expected to take part in the trial run of the mini-QFII program. Market watchers estimated the initial size of the fund pool to be about $1.5 billion.

Currently, overseas intuitions are only allowed to invest in the mainland's equities markets through the QFII program within certain quotas.

The initiative is part of China's effort to further open up its capital market and to promote international use of the yuan in order to reduce the country's reliance on the US dollar in cross-border transactions. It will also widen the investment channels for overseas holders of the Chinese currency.

Analysts said that the mini-QFII program will help shore up liquidity in the A-share market but the impact will be limited given the relatively small size of the initial capital pool.

"You can hardly say that the program would be a market saver as the potential amount of capital is unlikely to be big enough to offset the negative impact of the large share sales that could suck out a lot of liquidity," said Liao Qing, a Shenzhen-based analyst at Bohai Securities.

The A-share market has rallied 10 percent from this year's low after declining nearly 30 percent, making it one of the worst performers among the world's major capital markets.

But analysts said the market will continue to face liquidity pressure as it will continue to embrace an influx of new share offerings in the second half of the year.

China is poised to be the world's biggest IPO market this year as companies are likely to raise 500 billion yuan in Shanghai and Shenzhen, international accounting firm PricewaterhouseCoopers said this month.

Although it remains unclear what securities brokerages and funds will be eligible for the mini-QFII program and what products they will be allowed to invest in, analysts said that mini-QFII investors are likely to invest in sectors with good growth prospects such as information technology, alternative energy and healthcare.

They may also take advantage of the A-shares that are traded at a discount to their H-share counterparts, analysts said.

The regulator had granted quotas worth about $17.72 billion to 89 QFII funds by the end of June. Analysts estimate that the mini-QFII quota could rise to $15 billion in the years to come.