Beijing unveils reforms to RQFII quota system

Beijing’s foreign exchange regulator yesterday unveiled significant changes to the renminbi qualified foreign institutional investor (RQFII) scheme, whereby licensed holders will automatically receive quota based on a percentage of their assets under management (AUM).

The State Administration of Foreign Exchange (Safe) has also abolished RQFII quota limits for all foreign sovereign wealth funds, central banks and monetary authorities that complete the required registration process.

The new rules are similar to those introduced in February for the cross-border scheme’s non-renminbi equivalent (QFII). (RQFII enables offshore RMB to be used to invest onshore in China, while QFII is its dollar-based but less flexible equivalent.)

The new approach is a further step to harmonise rules between the two schemes. It is hoped that the new RQFII rules will also address capital repatriation hurdles. 

Previously, Safe granted a certain amount of quota to individual territories outside China, which institutions could apply for on a case-by-case basis. Yesterday’s change will be of particular benefit to Hong Kong, as it ran out of quota two years ago.

Licensed RQFII investors will now receive an initial quota based on a percentage of their AUM.

For RQFII holders or their parent companies whose assets are mostly invested outside China, the initial quota is $100 million plus 0.2% of average AUM during the previous three years, minus any quota under the QFII scheme.

For RQFII holders or their parent companies whose assets are mostly invested in China – such as the overseas units of mainland fund houses – the initial quota is Rmb5 billion ($748 million) plus 80% of AUM the previous year, minus any QFII quota.

Following the similar QFII reforms in February, which came as China pushed for A-shares to be included in MSCI’s emerging-market benchmarks, the index provider said the monthly capital-repatriation limit remained a significant hurdle. The cap means that foreign investors can only withdraw up to 20% of the net asset value of their onshore investments as of the previous year.

It is hoped that the new changes will address such concerns amid further harmonisation of the two schemes, as RQFII investors (open-ended funds) enjoy daily liquidity without the monthly repatriation limit.

A total of 170 foreign institutions hold Rmb510 billion in RQFII quota across Hong Kong and other nine countries. CSOP Asset Management, E Fund (HK) and Vanguard (Australia) are the three biggest holders under the programme, which launched in 2011. 

The new rules can be found here.