China may change foreign cap to entice global funds

China is considering relaxing the rules that cap foreign ownership in domestic publicly traded firms, people familiar with the matter said, as it seeks to lure global funds back to its $9.4 trillion stock market. 

Authorities are pondering policy tweaks to boost overseas ownership in stocks listed in Shanghai, Shenzhen and Beijing as part of a push to open up the market and boost trading, the people said, asking not to be identified as the information is private. China currently caps total foreign ownership in locally listed firms at 30%, and subjects a single foreign shareholder to a 10% limit.

The latest deliberations on foreign ownership are still in an early stage and details, such as which sectors might benefit and where to set new cap limits, haven’t been decided, the people said. While the initial takeup may be slow at a time when investors are concerned about the health of China’s economy, a potential relaxation in the near term also comes with a lower risk of a sudden influx of capital stoking market volatility. 

The discussions come amid an ongoing exodus of foreign funds from the world’s second largest equity market, with domestic shares ranking among the worst-performing globally this year. It’s another sign that China is following through on a July Politburo meeting pledge to “invigorate capital markets and boost investor confidence.”

Chinese stocks rallied on Friday, with the CSI 300 Index surging 1.8%, recovering after a three-day slide that dragged it to the lowest level since early November. Global investors bought onshore shares worth 7.5 billion yuan ($1 billion) on a net basis via trading links with Hong Kong, the biggest single-day purchase since July 31.

The China Securities Regulatory Commission didn’t respond to a faxed request for comment. The State Administration of Foreign Exchange didn’t respond to a request for comment.

Foreign investors dumped a record $12 billion A-shares last month and their holdings of China’s equities and debt dropped by about 1.37 trillion yuan, or 17%, from a December-2021 peak through the end of June 2023. 

Global investors are fleeing amid a slew of concerns from China’s fragile economy to the ongoing property crisis and worsening ties with the US. Among its package of measures to sooth investor nerves, Chinese authorities have cut handling fees for stock transactions and stamp duty. 

Midea Group Co., which is seeking a Hong Kong listing, is among the most foreign-owned with an overseas shareholding of 25.8%, as of Thursday, according to exchange data. Centre Testing International Group Co. has the highest foreign ownership at 27.48%, followed by Hongfa Technology Co. at 27.17% and Proya Cosmetics Co. at 26.37%.