How QFII and RQFII's merger can help foreign investors

Beijing’s new proposal to merge two of its leading inbound investment schemes in a bid to attract more foreign capital and further open up its capital market was warmly received by investment industry executives.

In a consultation paper released on January 31, the China Securities Regulatory Commission said it proposed to merge the Qualified Foreign Institutional Investor (QFII) and the Renminbi Qualified Foreign Institutional Investor (RQFII) schemes, in an effort to raise their waning appeal with foreign investors in today’s market environment. 

"In order to improve the QFII scheme and RQFII schemes, advance opening-up of China's capital markets to a higher level, and promote the steady and sound development of the capital markets, the CSRC drafted the measures," the regulator said in its statement.

Since the introduction of the Stock Connect and Bond Connect schemes in late 2014 and mid-2017, respectively, QFII and RQFII have gradually lost their appeal. Investors who lack quotas in the two schemes typically find it far easier to use the Connect programmes to gain access to China's onshore markets. 

Michael Wu

In addition to merging QFII and RQFII into one scheme, the CSRC's new rules aim to make it more attractive by relaxing relevant restrictions and expanding the investment scope, Michael Wu, country executive for Greater China at Northern Trust, told AsianInvestor.

Merging the two would mean investors only have to make one application, instead of separately submitting for both schemes. The combined scheme would also enjoy a wider investment choice that includes bond repurchase agreements.

That would give foreign investors the option to lend bonds they own when they need liquidity, rather than having to sell positions outright, Andy Seaman, chief investment officer of London-based asset manager Stratton Street Capital, told AsianInvestor.

Melody Yang

Combining QFII and RQFII schemes could effectively enhance their attractiveness, optimise the investor structure of Chinese securities market and stimulate vitality of the market, Melody Yang, a Beijing-based partner at Simmons & Simmons, told AsianInvestor.

The draft measures suggest that CSRC will review the application of foreign investors to participate in the combined scheme within 20 working days from the date it receives them, and consult with the State Administration of Foreign Exchange before revealing its verdict. This marks a simplification of the vetting process, which will hopefully further reduce the turnaround time for approval, said Yang.

The public can submit comments about the CSRC’s new measures until March 2.

GRADUALLY OPENING

Ricco Zhang

The announcement marks the latest step by China to open up its capital markets. The intensifying trade war it is conducting with the US and depreciation pressure on the renminbi is likely to cause Beijing to advance the pace of opening-up, be it via relaxing existing rules or through new endeavours like the London-Shanghai Connect, Ricco Zhang, Hong Kong-based director for Asia Pacific at the International Capital Market Association, told AsianInvestor.

Andy Seaman

Seaman agreed. “It is highly likely, in my opinion, that China will continue to ease restrictions on inbound investment … if [Beijing is] faced with too much upward pressure on the renminbi then relaxing controls on outbound capital is a likely response,” he said. “So there is the possible relaxation of RQDII and QDII investment parameters as a possible next step.”

One recent example of China’s liberalising efforts took place on January 29, when the People’s Bank of China authorised the Beijing-based wholly-owned subsidiary of Standard & Poor’s to rate onshore bonds in China. Previously only the onshore joint-ventures of international credit rating agencies were permitted to do so, but offshore investors have generally regarded these ratings as being unreliable. 

One of the drawbacks of the Chinese credit rating system is that it differs from those employed across the rest of the world. For example, a single ‘A’ rating from a Chinese rating agency is a very weak credit, whereas a single ‘A’ rating from Moody’s or S&P imply a much stronger credit profile.

The weakness of the local rating system became apparent in 2018 when a number of relatively highly rated companies suffered several corporate bond defaults. Allowing S&P to bring its international rating system to onshore bonds should help to enhance foreign demand by making China's credit ratings easier to understand, said Seaman.