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It looks like investors aren’t the only ones worried about China’s weakening economic growth! Although quarterly economic growth of 8.9% ain’t half bad for most major economies, that number just isn’t good enough for China.

Fortunately, the Chinese government isn’t taking its sputtering economic growth in stride. In fact, it wants to boost confidence in the domestic market so much that it has even loosened up on its policies that limit foreigners from buying Chinese assets!

Last December, the China Securities Regulatory Commission (CSRC) granted 14 foreign investors Qualified Foreign Institutional Investors (QFII) licenses. For those who don’t know yet, institutions with QFII licenses are the only foreign entities allowed to buy or sell yuan-denominated securities or invest in Chinese equity markets.

This is all part of the Chinese government’s elaborate plan to help the integration of a more liberalized yuan. As we all know, the yuan trades within a tight band versus the U.S. dollar, as the government doesn’t allow it to appreciate (or depreciate) too quickly.

By opening up its capital markets, the Chinese government is slowly loosening its control, allowing for the development of a “free” market. Since starting the program in 2002, there are now 135 entities with QFII licenses, with 29 of them approved in 2011. Apparently, 15 of those 29 were approved in the first 11 months of 2011.

QFII yuan

China has also recently approved an additional 950 million USD worth of quotas to seven new QFII firms and three existing ones. This brought the total amount of foreign funds that are allowed to be invested in China’s domestic markets to 21.64 billion USD. Not too shabby eh?

Now before you rush over to the bank and dump all your cash in the Chinese markets, you have to keep in mind that there are still many restrictions to the types of investments that QFII firms can make.

First, the maximum that each QFII program can invest is 20 billion yuan. Out of this amount, at least 80% (16 billion yuan) must be invested in fixed-income securities. The remaining 20% can then be invested in stocks and equity funds.

The reason for the cap is most likely to prevent the formation of a bubble that can occur following the inflow of excessive amounts of capital into a market.

Secondly, don’t expect the Chinese government to suddenly open their markets. We can expect this to be a long and drawn-out process, with the government taking its sweet time in handing out licenses. Word on the street is that a QFII firm must wait several months before it is finally approved to make investments in China.

For now, we should look at China’s recent moves as a symbol of its intention to move towards integrating its markets (and the yuan) into the global economy rather than an actual strategy for capital injection. I’m sure it’ll be interesting to see how soon the next approvals of QFII will be.

In any case, it’ll be interesting to see if this all does open up the yuan more for free trading and the potentially big impact it would have on the currency markets!