China Triples Foreign Investment Cap; Bumps Up Reserve Ratio

China has agreed to raise the cap on foreign investment to $30 billion from $10 billion, Beijing's foreign exchange regulator said Sunday prior to cabinet talks with the U.S. Also, in its first move since formally shifting to a tighter monetary policy, China will raise the proportion of deposits banks must keep on reserve. China's Central Economic Work meeting, which establishes the country's economic policy priorities for the coming year, ended Wednesday with a decision to shift to a "tight" policy from a "prudent" and "stable" one. On Christmas Day, the reserve requirement ratio will be raised one percentage point to 14.5%, its highest in about twenty years.

On the investment front, the Chinese State Administration of Foreign Exchange [SAFE] said "the QFII [Qualified Foreign Institutional Investor] investment quota will be raised to $30 billion" in order to "further open the country's capital markets to foreigners." The agency also wants to encourage Chinese to invest abroad under the Qualified Domestic Institutional Investor [QDII] program. "SAFE will broaden overseas securities investment by domestic residents to further enlarge the investment size under... QDII," SAFE said. Treasury Secretary Henry Paulson and a delegation will attend another round of an ongoing "strategic economic dialogue" with China this Wednesday and Thursday. For investors interested in Chinese equities, the ETFs FXI and PGJ offer broad exposure. China's Shanghai Composite Index climbed 1.4% Monday (Asian Market Summary).

Sources: Reuters, Wall Street Journal

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