Barings eyes China debt, flags RQFII concerns

Baring Asset Management is keen to invest in Chinese fixed income via the renminbi qualified foreign institutional investor programme, but is worried about quota expansion resulting in oversupply of RQFII products.

The firm already has a QFII licence – which allows investors to buy mainland securities and fixed income using US dollars – and has thus far received $200 million in quota. But Barings is keen to take advantage of China’s debt markets using renminbi, pending RQFII licence approval.

“RQFII is now the first quota which allows a 100% allocation to onshore fixed income without having to take up equivalent amounts of equity,” says David Stevenson, Barings’ head of product and business development.

He sees this as attractive because the firm does not need another tranche of equity quota, as it already has onshore equity capability under the Baring China A-Share Fund. Stevenson declined to comment specifically on the firm’s application for a licence.

China’s debt market – in which there is Rmb450 billion ($74.3 billion) invested – is extremely appealing, says Stevenson, noting that Barings recently launched an Asian bond fund and one focused on Chinese bonds.

If approved, Barings would become the second UK asset manager to receive an RQFII licence. Emerging markets specialist Ashmore was the first, on December 17.

The scheme is interesting not only due to product potential, but because the rollout to London, Singapore and Taiwan is a very meaningful step, says Stevenson.

Yet there are reasons to be cautious, he notes, highlighting the rapid expansion of the RQFII programme. “We need to tread carefully, as there is a significant amount of RQFII quota in the market and the last thing we want to do is to launch a fund into a market with supply surplus.”

The RQFII scheme – which allows investors to invest into mainland equities and bonds using offshore renminbi – launched in 2011. At the time, only Hong Kong subsidiaries of Chinese fund managers were eligible to participate.

It has since opened to Hong Kong financial institutions in March 2012 and to London and Singapore in July 2013, with each city slated to receive Rmb80 billion and Rmb50 billion, respectively. And pending approval by the Taiwanese legislature, Taiwan will receive Rmb100 billion in quota.

Since RQFII launched, China’s State Administration of Foreign Exchange (Safe) has granted Rmb157.5 billion in RQFII quota to 52 institutions, as of the end of December.

In addition to Ashmore, other December recipients of quota were Guangdong Securities, Wing Lung Asset Management and UBS Global Asset Management. 

There were no QFII licences handed out in December, leaving the number of QFII licence holders at 251.