QFII, RQFII merger to give investors 'best of both'

The merger of China’s QFII and RQFII schemes has been designed to ensure that investors get the best of both worlds, a senior banker said yesterday.

The Credit Suisse executive said that investors in the Chinese schemes could expect to enjoy more flexible repatriation and hedging rules when authorities on the mainland finalise the merger, which was revealed by AsianInvestor this month.

Meanwhile the banker also raised concerns about heightened operational risks for the securities industry since the launch of the Stock Connect scheme last year.

Nicole Yuen, vice-chairman and chief operating officer for Greater China at Credit Suisse, said the merger of qualified foreign institutional investor (QFII) and its renminbi equivalent (RQFII) was a way of attracting more global investments to China’s capital markets.

She said one reason the China Securities Regulatory Commission (CSRC) was planning to combine them was because RQFII has more flexibility in terms of repatriation and funding. The regulator is considering lowering the eligibility criteria by turning the approval system into a registration system, relaxing the lock-up period and simplifying the repatriation process.

“That is a good thing,” Yuen said. “By combining the two [schemes], you can get the best of both. For example, RQFII still has some issues in hedging in the futures market, but more flexibility in repatriation.” Yuen was speaking at the Credit Suisse Asian Investment Conference in Hong Kong yesterday.

Yuen said she expects the merger will benefit QFII investors marginally more so than RQFII holders because QFII will leverage the benefits which RQFII has, such as more flexibility in repatriation. On the other hand, RQFII investors could enjoy the hedging tools which QFII holders use.

QFII investors are currently only allowed to hedge up to their original quotas, while RQFII investors face an obstacle in their lack of regulatory details. QFII investors can only repatriate assets on a weekly basis, while RQFII open-ended funds can repatriate on a daily basis.

The merger is not intended to lower standards, but is the key to the development of both schemes, Yuen said.

“The most imminent step for the CSRC to consider is to increase hedging activities allowed in QFII and RQFII,” said Yuen.

“What we would like to see, as investors, is allowing hedging activities to match AUM, rather than being restricted to the original quotas.”

Yuen expects China’s regulators to consider giving QFII and RQFII investors the so-called ‘National Treatment’. This would mean QFII and RQFII investors would be treated like a normal local investor and would be able to buy or sell any kind of investment product, or at least those which are publicly-listed.

On the question of Stock Connect, Yuen said it was a game-changer for Hong Kong’s stock market, but the securities industry had become concerned about the increased operational risks stemming from the cross-border trading link.

“The recent 'rushed' introduction of the short-selling regime is an example - a lot of market participants (on the buy side and sell side) believe such an introduction was premature,” said Yuen.

The Hong Kong-Shanghai trading link was launched on November 17 last year, and aggregate volumes have reached Rmb124 billion, or 41% of the total quotas. Yuen indicated that most trading activities had come from hedge funds which lacked QFII and RQFII quotas, while long-only managers had shied away from the link due to the availability of such quotas.

While most long-only managers were awaiting the issue of beneficial ownership to be resolved, Yuen pointed out another area for improvement was investor protection, particularly on trading access limitations because of differences between Hong Kong and China’s public holiday schedules.

Yuen proposed that market participants lobby the CSRC for a rule change to prevent A-share firms from announcing price-sensitive information on days when one or both sides of the border were closed for a holiday.

“I hate to draw the parallel between Stock Connect and mainland tourists’ multiple-entry visa, but I do think there are similarities,” Yuen said. “Stock Connect is a key game-changer to the Hong Kong securities market, and so was the multiple-entry visa in giving a big boost to the Hong Kong economy. However, the devil is in the implementation.”