The introduction in 2003 of the QFII scheme that allows for foreign participation in renminbi- denominated stocks has made clear the Chinese government's intention of building a stock market to rival the current largest market in Asia in terms of market capitalization: Tokyo. Implementation of the scheme suggests that China has begun to consider when it will allow more foreign institutions to participate directly in the Chinese securities market. For the more optimistic China observers, QFII is a necessary first step toward the day when foreign individual investors will be permitted to trade Chinese stocks.
The QFII scheme draws heavily upon the earlier financial liberalization of other East Asian markets such as South Korea and Taiwan, whose market transformations have been heavily studied and analyzed by the economic mandarins in Beijing. The unltimate concern that the QFII program addresses for Chinese authorities is the question of how to bring in massive inflows of foreign investment in such a way as to avoid vulnerability to an equally massive inflows of foreign investment in such a way as to avoid vulnerability to an equally massive capital flight as witnessed during the 1997 Asian financial crisis.
In June 2003, China granted QFII status to foreign financial institutions for the first time, launching the QFII program among high hopes that had been gathering steam since the scheme's formal establishment at the end of 2002. Citigroup, UBS Warburg, Nomura Securities and Morgan Stanley were the first four institutions permitted to invest in selected A-shares. They have since been joined by 13 other foreign institutions, with that number all but certain to continue growing.
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