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China's QFII No Longer an Exclusive Club

But A-shares are ominously cheap. Veteran investors say Chinese stocks differ from their foreign peers because of poor transparency, inconsistent regulation and raw deals for minority shareholders. Still, the market is loaded with the big guns of Chinese firms, shares of which are sometimes perceived as paying lower mutliples.

Since QFII in China is hardly an exclusive club anymore, investors shopping for exchange-traded funds or other managed products must study harder before choosing who to hire or from whom to buy shares.

"The general consensus is that most investors are underweight in China because of the current capital restrictions, so there is already demand waiting for access to the China market that will jump at the chance to access A-shares," says Jay Jacobs, research analyst with Global X Management in New York.

Hong Kong is a valid place to shop. Players such as Value Partners are getting a particular boost because they belong to China's two-year-old RQFII scheme, where the "R" stands for renminbi. China hatched the scheme to internationalize its currency, and Hong Kong is the chief gateway for that cause.

Accordingly, since March the yuan program has begun easing up its rules. The regulations permit RQFII status for Hong Kong-headquartered firms -- some of the most knowledgeable about mainland China investment due to culture and geography -- as well as the Hong Kong offices of multinational corporation investors. RQFII investors are also now allowed to invest in whatever assets they please, no longer restricted mostly to fixed income as before.

Value Partners plans to apply later for investment quotas. "This process presents huge potential for the asset management industry in Hong Kong, a major offshore renminbi center and the focal point of capital flows," company CEO Timothy Tse says in a statement.

Venture capital and private equity funds in China would also keenly understand who's worth the investment, Bernstein notes. That hypothesis would favor QFII licensees such as IDG Capital Management, which received a $60 million quota a year ago. It has invested in Chinese superstars such as Baidu (BIDU) and Ctrip (CTRP).

But top-ranked foreign venture capital and private equity firms with interests in China are largely missing from the country's qualified investor list.

Investors can also study which companies have gone back for seconds after qualifying in the early days. Those names include Morgan Stanley (MS), which received a $600 million quota in 2003 and $450 million in 2006 under an investment management company. Credit Suisse (CS) is another case, with a $500 million quota in 2003 and another $400 million in 2008.

The appetite for more would suggest something has gone well.

At the time of publication the author had no position in any of the stocks mentioned.

Ralph Jennings is on LinkedIn.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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