Foreign investment in China and Qualified Foreign Institutional Investor (QFII)

Although foreign direct investment has been flowing into China at record high levels in recent years, foreign investors were not permitted to enter the domestic Chinese shares market (A shares) until the Chinese authorities decided at the end of 2002 to allow selected Qualified Foreign Institutional Investor (QFII) to enter the Chinese A-share market under a quantitative quota system. The aim of this financial reform initiative was to provide a pilot scheme for relaxing, in a limited way, foreign exchange controls over the country's capital account, as well as to leverage the investment and management skills of successful foreign financial institutions to raise the standards of the Chinese market. QFII are perceived by the Chinese Government to have stronger motivation to undertake long-term investment strategies. They are expected to bring with them not only advanced investment methodology and skills, but also an investment approach that may help develop a more stable and healthy stock market environment. This study examines the empirical evidence of this development to assess if such expectations are being fulfilled. The findings suggest that QFII have made some inroads, but have not yet been able to exert long-term impacts on the Chinese market.