Overseas taste for China A-shares recovers (3)

Restrictions bug

An investment by a QFII investor is subject to rules. For example, a participant has to invest as soon as approval is received, and strict restrictions on stock positions prevail. Then, too, the regulator may reduce or revoke a QFII's quota if the full amount of the quota is not invested within a specified time.

"Such restrictions prevent QFIIs from investing based on market timing," said Li Chen, strategist at UBS Investment Research.

Another question facing QFIIs is the ambiguity of tax policy, according to Cindy Qu, an analyst at Z-Ben Advisors.

Under the current regulations, a QFII participant is exempt from the 5 percent business tax on investment gains but needs to pay a 10 percent corporate income tax on dividends, bonuses and interest income gained in China.

Talk about China imposing a capital gains tax on QFII investors persists, but no proposals have been introduced.

These uncertainties force many QFII investors to set aside funds from their profits for a possible future tax.

The CSRC has pledged to further simplify the QFII application process, ease curbs on fund remittances and setting up accounts, and clarify the QFII tax policy as soon as possible. No timetable has been announced.

"Addressing these issues will be critical if regulators want to stimulate more investment interest in China," said Guilloux, who said he expects action sooner than later.

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