China Eases Rules for Long-Term Funds to Support Stock Market

In a move to bolster investor confidence and encourage long-term capital inflows, China has relaxed its strategic investment rules for foreign investors in listed domestic firms. The new policy, effective from December 2, 2023, aims to attract more medium- and long-term overseas capital into the Chinese stock market. Here's what you need to know about this significant development.



The revised rules, jointly released by six Chinese authorities, including the commerce ministry, allow foreign natural persons to make strategic investments in listed companies, previously only legal entities were permitted to do so. This broadens the pool of potential investors and encourages more foreign participation in the Chinese stock market.

Additionally, the asset requirements for foreign investors have been lowered. For non-controlling foreign investors, the asset threshold has been reduced to $50 million (from $100 million) for their total assets, and $300 million (from $500 million) for their assets under management. This reduction in investment threshold will make it easier for foreign investors to enter the Chinese market.

The new policy also adds tender offers as a new channel for foreign investment, in addition to the currently available routes of private placement and negotiated transfers. This provides foreign investors with more flexibility in their investment strategies. Furthermore, it allows investors to pay by using their equity in non-listed companies abroad, in contrast with the existing policy which only accepts cash or listed equity.

Even the minimum shareholding ratio and lock-up period have been lowered. The first strategic investment of a foreign investor needs to result in a minimum shareholding of 5 percent of the company's equity instead of the earlier requirement of more than 10 percent. The lock-up period is reduced to one year (from three years), encouraging foreign investors to adopt a more long-term investment strategy.

These changes are expected to have a positive impact on the flow of long-term capital into the Chinese stock market. For instance, UBS Investment Bank has raised its China 2024 growth forecast to 4.8% from 4.6%, and Goldman Sachs has lifted China's GDP prediction this year from 4.7% to 4.9%, indicating increased optimism among international investors (Xinhua, 2023).

In conclusion, China's relaxation of strategic investment rules for foreign investors in listed domestic firms is a welcome move that is likely to boost foreign investors' confidence in the Chinese stock market. This, in turn, is expected to lead to an increase in long-term capital inflows, supporting the growth and development of the Chinese stock market. As an investor, it is essential to stay informed about such policy changes and their potential impact on the market.