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Cautiously, Foreign Firms Play Chinese Stock Markets

Indeed, the only QFII players with individual quotas of $1 billion or more are sovereign wealth funds and state banks. SAFE records show these include investment funds tied to the governments of Qatar, Abu Dhabi, Kuwait, Malaysia, Hong Kong, Singapore and Norway.

This month South Korea's central bank, which also invests through QFII, was allowed to double its previous quota to $600 million.

The Chinese government has opened the QFII door wider in stages since awarding the first quotas in 2003, which let foreign firms buy stock on the Shanghai and Shenzhen exchanges for the first time.

The total quota rose to $80 billion from $30 billion in April 2012, and then jumped to $150 billion last July. The government says it wants to open markets to foreigners slowly so as not to disrupt domestic investors. Yet throughout the program's history, the total amount invested by overseas firms has never come close to reaching QFII's total potential.

Today, about three-fourths of QFII investor money is steered into equities, which had a terrible 2013 in China, while the rest goes into bonds and other products. The Shanghai Composite Index fell 6.75% between end-2012 and a year later, while the Shenzhen Component Index drooped 10.91% during the same period, making Chinese stock markets among the world's worst performers last year.

Nevertheless, plenty of foreign investors of all stripes see good reasons to be in China. In addition to asset managers and investment banks, QFII players include the Ford Foundation, Mayo Clinic and the University of Notre Dame.

Even a few mainland funds have decided its worth playing the game. The Chinese asset manager Harvest Global Investments, for example, is a licensed QFII investor through a Hong Kong subsidiary.

- Written by Eric Johnson in Beijing

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

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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