China poised to lift restriction on QFII capital repatriation

China could be about to lift restrictions on capital repatriation applicable under the qualified foreign institutional investor (QFII) scheme, a step that could give fund managers and international asset owners more confidence to invest more into the mainland’s capital markets.

That, combined with concurrent changes to foreign ownership rules of joint venture fund houses, is likely to increase the array of foreign market entrants, raising competition in the local fund market and potentially benefiting local investors.

Currently the rules for QFII restrict fund managers to repatriating 20% of their capital out of China in any one month. However, AsianInvestor understands that the China Securities Regulatory Commission (CSRC) has been talking with global custodian banks and asset managers about lifting the restriction, although no formal policy statement has been made.

Rakesh Vengayil, BNP Paribas Asset Management’s deputy chief executive in Hong Kong told AsianInvestor he understood discussions have been taking place, and that this could ease the door to more foreign capital inflows.

"For global investors, this means there will be no more liquidity constraints. If they want to take money out, they don’t have to wait in the queue or wait for a particular window to open,” he said.

"We know the Chinese regulator has been thinking about this for a long time. This is largely a reflection of China’s inclusion in global [equity] indices because one of the major requirements for that was providing liquidity. This is part of the overall strategy to structurally address some of the issues foreign investors have been facing."

Jack Lee, head of A-share research at Schroders, confirmed the move, saying,"One of the major obstacles for foreign investors was the 20% capital repatriation rule. Now we learn from our custodian banks that this restriction is going to be lifted."

Global index provider MSCI introduced China’s A-shares into its emerging markets benchmark in June, but it resisted doing so on a fully weighted basis. It had also avoided adding the local shares at all at its annual index reviews over the previous three or four years, citing concerns including the QFII quota allocation process and capital mobility restrictions. This latest concession by China is seen as part of the process for full integration.

Though he could not confirm the rumours, Chia Chin Ping, managing director of MSCI Asia said: “It should benefit existing QFIIs if it happens.”

The CSRC did not respond to AsianInvestor's request for comment.

Capital concerns

Removing the capital repatriation restriction would help ease one of the fears that surround investors that put money into China’s onshore capital markets via QFII.

They have always feared that the rule would restrict them from withdrawing their money out quickly in the event of another global financial crisis or a sudden major market correction in China, like a big drop in its local equity market that began June 2015 and lasted the rest of the year. Worse, some feared Beijing could make the terms more onerous in the event of a major market calamity, to prevent capital flight.

Vengayil suggested that investors using QFII were also concerned about the lack of a level playing field for capital invested via the quota scheme. QFII launched in 2002, and is the oldest cross-border investment channel for foreign investors into China’s domestic capital market. But others have developed since, such as the renminbi qualified foreign institutional investor initiative (RQFII), and, more recently, Stock Connect.

By liberalising the capital repatriation rule, foreign investors could seek to increase their investments into China via unused QFII quota. Vengayil said, “In a sense now, this is an advantage for those investors who may have additional quota which they can now use."

As of October 2017, the State Administration of Foreign Exchange had issued $94.5 billion in total QFII quotas, according to data from Shanghai based Z-Ben Advisors. This compared to $87 billion at the end of 2016. Meanwhile the RQFII approved quota stood at Rmb590.4 billion ($88.9 billion) as of October, versus $76 billion throughout 2016. However, in a report in June, Standard Chartered said that QFII-approved fund houses were using less than half of their QFII quotas. 

In contrast, by October 20 of this year, the accumulated net northbound trading volume on Stock Connect had reached $50 billion.

Easing foreign ownership rules

The potential move to liberalise QFII rules comes at a time China is relaxing the rules on foreign ownership of fund management firms, allowing them to take a 51% market share in joint ventures with local houses instead of maxing out at 49%, with the potential to wholly own them in three years.

The liberalisation of QFII capital repatration, alongside this majority ownership, could lead more foreign fund houses to consider outright asset management operations in China. And that could end up offering international and local asset owners more investment choices.

Many foreign asset management players have resisted the temptation to enter joint ventures as minority partners. Vengayil reckons the new foreign ownership rules "will make a big difference for those asset managers who are bolder and braver when it comes to China. You will see more of these companies now coming into the market”.

BNP Paribas AM is one such firm weighing its options. It was one of the early QFIIs in 2003 and established a joint venture called HFT Investment Management with Haitong Securities. Then in 2015 it established a wholly foreign owned entity (WFOE) in Shanghai. 

Vengayil said the firm has already applied for a qualified domestic limited partnership (QDLP) licence, “which will enable us to launch a locally domiciled fund that can feed into our global funds”.

He noted that BNP was looking at selling global products into China, and that it could manufacture Chinese products for its global clients via HFT Investment Management. “The third option is having an operation managing China investments for Chinese clients,” Vengayil added. “We aim to participate in all three segments."