UBS eyes more QFII quotas, bullish on China market

Mon Jan 18, 2010 2:35am EST

* UBS soon to apply for fresh quotas under new rules

* Single QFII's quota limit now at $1 billion

* Rules ban QFIIs from lending or transferring their quotas

* UBS sees China's stock market rising steadily in 2010

By Lu Jianxin and Jason Subler

SHANGHAI, Jan 18 (Reuters) - UBS AG (UBSN.VX) will soon apply for more quotas to invest in China's capital markets on top of the $800 million it is already permitted, as it is bullish about the stock market's prospects, an executive said on Monday.

UBS, already the biggest quota holder under China's Qualified Foreign Institutional Investor (QFII) scheme, would be permitted under new rules issued last year to apply for up to a total of $1 billion in quotas, or an additional $200 million. [ID:nPEK228240]

Nicole Yuen, managing director and head of China equities at UBS, did not specify how much in additional quotas the Swiss investment bank would be applying for.

"Our quotas are still short of demand, and I can say our application will be submitted very soon," Yuen told reporters, noting that UBS first needed to clear up all the quotas it had once agreed to use on behalf of its clients.

UBS is the first major foreign institutional investor to express its aim to expand its investment quota in line with the new rules.

New regulations issued last October also ordered QFIIs not to lend or transfer their China investment quotas to any other parties and that those that had already done so must take the lent or transferred quotas back before being allowed to apply for new ones.

Many QFIIs previously lent such quotas to their clients for a fee, as the rules did not explicitly ban them from doing so.

Complicating the situation was that some clients who previously borrowed others' quotas were later approved as QFIIs themselves, meaning some QFIIs were using one another's quotas.

"The new regulations were inconvenient as we had to clear some stock positions to meet the new requirements," said a QFII investor who declined to be quoted by name due to the sensitivity of the issue.

The overall impact on China's market, however, is still tiny as total QFII quotas for China investment equal less than 1 percent of the country's total stock market capitalisation.

China launched the QFII programme in 2003, allowing selected foreign institutions to invest in China's main yuan-denominated A-share stock market and the government bond market.

Last year, China granted a combined $3.3 billion in QFII quotas, bringing total investment quotas for the 86 QFIIs operating in China to $16.67 billion by the end of 2009, the official Shanghai Securities News has reported.

Yuen said UBS was optimistic over the prospects of China's stock market despite its recent volatility. China's benchmark Shanghai Composite Index .SSEC has generally fallen since late November amid an official clampdown on asset prices, though it ended at a nearly one-week high on Monday. [ID:nTOE60307Z]

Supporting factors would include reforms such as the imminent launch of stock index futures, margin trading and short selling, she said. [ID:nTOE60708W]

"We expect a stable rise in China's stock market for 2010 in particular because China's economic fundamentals are very strong," Yuen said.

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