China's foreign exchange regulator said on Friday it believed most of the qualified foreign institutional investors (QFIIs) in its capital markets are long-term investors, but vowed penalties if they speculate on appreciation of the local currency, the renminbi.

The reason some QFIIs, which were brought into the domestic stock market in the middle of last year in a major reform drive, hold hefty funds in bank accounts, instead of stock holdings as expected, was that they needed time to familiarize themselves with the market and to make investment decisions, said the State Administration of Foreign Exchange (SAFE).

"We have said time again that China will maintain the fundamental stability in the renminbi's exchange rate at a reasonable and balanced level. Therefore, we believe that most QFIIs have not come with the purpose of speculating on a renminbi appreciation," a SAFE spokesperson said.

"But if we find them keeping their money at banks for long periods of time to speculate on the exchange rate and interest rate, instead of investing in the domestic securities market, we will also take measures to restrict them, and may even ask them to leave the market," he added.

China has approved a combined investment quota of US$1.76 billion for 12 QFIIs since it announced the policy more than two years ago in efforts to open up the domestic market.

Foreign financial institutions have been eager to get a QFII license, especially in recent months when speculation was rife that China may revalue its currency, and some feared China was considering suspending the program as approvals slowed down noticeably in the first four months of this year.

The SAFE spokesperson gave further assurances Friday that the QFII policy was unchanged, saying the authorities were simply readjusting an experimental policy and the administration was currently reviewing QFIIs' applications for new investment quotas.

(China Daily May 29, 2004)