New QFII tax rules set to be published

Draft rules concerning the imposition of capital gains taxes on foreign qualified institutional investors (QFIIs) are ready to be published, and the tax can help to limit capital outflows and improve the quality of investment projects, analysts said.

Regulators are soliciting opinions on the draft from institutional investors, including custodian banks and brokerages, according to a Sunday report in Caixin magazine, citing anonymous sources.

The report didn't provide details about proposed rates of tax or the methods of calculation.

Some global custodian banks and brokerages, including Citibank (China) Co Ltd and Morgan Stanley (China), said that they are not aware of the rules.

"It is reasonable to levy this tax soon, because it can be seen as a way of strengthening capital controls for the central government that is aiming to prevent money outflows," said Jing Xuecheng, director-general of the Harmony Strategy Research Council think tank.

China's foreign-exchange reserves declined to $3.18 trillion at the end of last year from US$3.2 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 US$15.8 billion in the last month of 2011, compared with a drop of US$3.17 billion in October, indicating that the capital outflows were accelerating.

According to the rules of the International Monetary Fund, governments have the right to take special measures to limit capital flows in order to reduce financial risks, said Jing.

Since 2003, China has been granting licenses allowing foreign institutional investors access to its capital markets. In October last year, these institutions were allowed to make direct overseas investments in yuan.

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 State Administration of Foreign Exchange.

"It is not proper to impose high tax rates on these overseas investors, otherwise they may be frightened and quickly move their capital out," Jing said.

Wu Xiaoqiu, director of the Financial and Securities Institute at Beijing's Renmin University of China, said that the current capital scale of QFII is out of step with the pace of the internationalization of the nation's financial system.

"More rules that encourage the expansion of QFII quotas should be launched soon," Wu said.