Foreign investors licensed to invest in China's local-currency Class-A share market plan to increase Chinese equities investment, betting Beijing would strengthen the yuan against the US dollar.

UBS AG and several US-based investment banks permitted to invest in yuan-denominated A-shares under the Qualified Foreign Institutional Invest (QFII) program are likely to apply to the Chinese government for additional investment quotas, said media reports.

Nikko asset Management Co Ltd was also approved yesterday an investment limit of US$50 million, bringing up to US$1.7 billion the combined investment amount of QFIIs since November 2002 when the program is kicked off.

"It is only a matter of time before the appreciation of the Chinese currency. The Chinese government will adjust the exchange rate policy when the macro-economic situation permits," said Zhan Long, executive deputy general manager of China Merchants Fund Co Ltd.

"Qfiis are sharing the benefit of the Chinese economic development and capital market through stock investment, and at the same time, they are anticipating that the yuan will appreciate."

The impulse that has prompted QFIIs to consider investing more in the A-share markets in Shanghai and Shenzhen came from the Chinese government's softened stance on revising its fixed-exchange rate policy that has pegged the yuan to the greenback at 8.277 since 1995.

However, ING, one of the 12 QFII firms, is reported to put only half of its US$100 million quota into its account slated for equity investment. It didn't give a reason.

Zhou xiaochuan, governor of the People's Bank of China, the central bank, said earlier at the bank's meeting in Beijing that the Chinese currency will be kept at a reasonable and balanced level.

Zhou's remark was perceived as a subtle change from the blunt denial by the central bank of a report during the weekend by China Business Post that the Chinese government would let the yuan rise 5 percent against the US dollar to 7.887 in March.

"The anticipation of the yuan is only partly accountable for QFII's enthusiasm for Chinese stocks. Most important of all, they are bullish on Chinese stocks because of China's economy," said Fang Yi, analyst with Haitong Securities Co Ltd.

Foreign investors have been lured into China's stock markets by its rapid growth. Last year, China's economy expanded 9.1 percent and is forecast to grow by 9.5 percent this year, according to Goldman Sachs.

The investment quota for a single QFII ranges from US$50 million to US$800 million, according to the specific rule.

(Shanghai Daily February 13, 2004)