New QFII Tax Rules Set To Be Published

David Nealis at the Shanghai Stock Exchange

New QFII Tax Rules Set To Be Published

New rules covering capital gains taxes on foreign qualified institutional investors (QFIIs) are ready to be published in China. It looks as if the new rules are going to be put in place to limit capital outflows from China.

In the typical Chinese style of regulation, government regulators are soliciting opinions on the new rules from QFII members, custodian banks, and large brokerage firms.

The report released to the public by the Chinese government last week did not provide any in-depth details or methods of calculation for the new taxes.

China's foreign-exchange reserves declined to $3.18 trillion at the end of last year from $3.20 trillion at the end of September, registering the first quarterly drop in more than a decade, according to data from the People's Bank of China.

In addition, the central bank's Yuan positions for foreign-exchange purchases declined by $15.8 billion in the last month of 2011 compared with a drop of $3.17 billion in October, indicating that the capital outflows were accelerating.

As of Jan 20, 117 foreign institutional investors with combined quotas of $22.24 billion were allowed to invest in the world's second-largest economy, according to the Chinese State Administration of Foreign Exchange.

Clearly China has the sovereign right to limit capital flows, but if the taxes they impose on foreign investors are too high they will scare off those investors who will then actively seek new markets for their investments.