China set to increase foreign investment limits to $1 billion

There's lots of excitement in China today as regulators announced plans to increase the amount of money individual institutions are allowed to invest in the country's stock markets through the Qualified Foreign Institutional Investors program (QFII).

In a statement, the State Administration of Foreign Exchange said that the new draft rules were formulated to stimulate "medium and long-term investment" and to make investing more "convenient."

Under the new regulations, foreign investors will be able to invest a maximum of $1 billion, up from the previous limit of $800 million. The overall foreign investment quota will remain at $30 billion. The agency is clearly hoping that the changes will bolster investor sentiment and keep Chinese stocks on an upward trajectory, allaying fears that a drop in Chinese bank lending might chill the markets.

The government's action vindicated the optimism of bloggers like Michael Pettis who had predicted earlier in the week that, "The authorities will not let the market continue falling, and will introduce measures to force it up."

The regulator's statement was released towards the end of the day Friday, leaving just enough time to boost Hong Kong's Hang Seng, which soared dramatically after the news. It scored its biggest gain since July 23, closing up 2.8 percent to end the day at 20,318.

Predictably, the Hang Seng China Enterprises Index, which follows the Hong Kong-listed shares of Chinese companies, rose 2.9 percent on the market-altering news from across the sea. Banks fared especially well, with Industrial & Commercial Bank of China Ltd. surging 4.7 percent, China Construction Bank Corp. adding 3.6 percent, and HSBC Holdings Plc up 1.3 percent.

However, the statement came after the close of the Shanghai market, leaving the Shanghai Composite Index up only 0.6 percent for the day at 2,862. Still, that was enough to secure a fourth straight day of gains. Chinese mining stocks were on the rise again with Henan Yuguang Gold & Lead Co. maxing out its 10 percent daily gain limit on news of China's promise to close substandard smelters, and Zijin Mining Group Co. up 2.8 percent. Banking stocks saw gains with the Chinese shares of Industrial & Commercial Bank of China Ltd., the country's largest lender, inching up 1.1 percent.

In Japan, the picture was not so rosy, with the Nikkei down 0.27 percent, hitting its lowest close in over a month. Financial company Daiwa plunged 6.1 percent, and Dainippon Sumitomo Pharma Co. also sank 6.1 percent after Bank of America Corp. lowered investment rating.

While Japan may be the world's second largest economy, these days investors' eyes remain firmly fixed on China.

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