TAIPEI, Taiwan (TheStreet) - Foreign institutions once would yearn for a way to trade China's elusive "A" shares and the government let only a few in. Now those investors are taking money out and China has announced a pretty-please, cherry-on-top scheme to get them to keep their money there and attract others.
Specifically, the State Administration of Foreign Exchange issued guidelines this month that make investment more flexible and money easier to repatriate. That's a lift for 279 offshore institutions, mainly asset managers and sovereign wealth funds, with foreign exchange quotas now, plus any that apply later.
But the sudden offer again reflects deep concern in Beijing about flagging capital markets and economic growth, trends that have rattled markets worldwide.
Chinese "A" shares on the benchmark Shanghai Composite Index have fallen about 17% this year to date after a 40% drop in mid-2015 and a slow recovery through December. Beijing looks to its stock market to capitalize private firms, a possible new cornerstone for GDP growth that slipped to a quarter-century low of 6.9% last year.
"To open the market further to foreign investors will improve China's image," said Liang Kuo-yuan, chairman of the Yuanta-Polaris Research Institute in Taipei.
The state administration's guidelines announced on Feb. 4 lower the minimum investment quota from $50 million to $20 million. The upper limit will go from $1 billion to $5 billion.
Also per the new regulations, China will start to allow daily repatriation for open-ended funds, though with net amounts subject to earlier monthly restrictions. A lock period will be lowered from one year to three months.
Institutions daunted by China's stock market volatility want more freedom to repatriate funds. Yet Communist China depends on a certain amount of money staying onshore to manage the economy.
Net foreign currency investment by foreign institutions dropped slightly in January to $80.8 billion. Capital flight overall was estimated at $500 billion last year, prompting Beijing to pour billions of dollars into its banking system.
Although the rules make it easier to remove money, they could inspire new investment by easing worries about repatriation.
"(The guidelines) are basically a consequence of the increasing fear by investors that their investment may be locked up in China," said Alicia Garcia Herrero, chief Asia-Pacific economist with French investment bank Natixis. "Forex reserves continue to drop fast and that is what matters to the mind of many investors."
The new investment guidelines fit with what analysts call a growing trend to welcome foreign investment in listed, local non-manufacturing firms that may someday drive the economy.
Foreign individuals are barred from trading "A" shares but may buy into funds offered by foreign institutions with the quotas. Funds include the Goldman Sachs China Equity Fund Class "A" Shares GNIAX , the Fidelity Emerging Asia Fund FSEAX or the iShares China Large-Cap ETF FXI .
As another tribute to foreign investment, China is considering whether to link "A" shares to freely traded exchanges in Hong Kong and London. Those links would let individual foreign investors pick Chinese stocks without going through a mutual fund or ETF.
When China launched its quota scheme for institutions in 2003, regulators moved cautiously to ensure curbs on flows of assets in and out of the command economy. Institutions would clamor to get licenses and invest in an economy growing then at 9%-10%.
Now the government is desperate for inflows. "This set of rules can attract some flows into China," Liang said. "I imagine it's related to foreign exchange reserves going down so far."