China’s combined QFII, RQFII could boost futures usage

China’s move to ease capital market access for foreign investors by combining two of its major inbound investment programmes will broaden asset class choices, with investors showing particular enthusiasm for increased futures trading, say investment industry advisers.

While the eventual impact on capital inflows will take time to materialise, the move is also seen as symbolic of Beijing’s desire to integrate with the global economy, despite rising tensions between the country and the US.

On September 25 the China Securities Regulatory Commission (CSRC), along with the People’s Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE), announced finalised “measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors (QFII) and the RMB Qualified Foreign Institutional Investors (RQFII)” that will take effect from November 1.

The new measures were first proposed in January 2019. They will combine the previous two separate rules covering the QFII and the RQFII schemes. 

“China is moving ahead with its financial reform despite challenges from a slowing economy and geopolitical tensions. It is sending a message to the world that it still believes in economic cooperation and will continue opening its markets further to foreign businesses at a time when protectionism is rising,” Michael Wu, country executive for Greater China at Northern Trust, told AsianInvestor.

The merged scheme will lower the entry requirements and simplify the procedures for foreign fund managers and institutional investors to access China’s capital markets. Previous restrictions that resulted in relatively lower participation and usage of the QFII/RQFII quotas have largely been removed, Melody Yang, a partner at law firm Simmons & Simmons in Beijing, told AsianInvestor.

Yang highlighted that China has fixed many of the regulatory concerns raised by investors so that they could fully employ their investment strategies with the new scheme.

“We see that the regulator [has moved] in line with some of the developed economies in investment policies development, which will encourage investors’ appetite,” she added.

FUTURES TRADING POTENTIAL

Melody Yang,

Simmons & Simmons

Under the combined scheme, foreign investors will be able to leverage National Equities Exchange and Quotations securities, which are a combination of: over-the-counter products, private securities investment funds, asset-backed securities, financial futures, commodity futures, options, bond repurchase agreement transactions, margin trading and securities financing on stock exchanges, and securities lending.

Among these instruments, Yang sees the potential for investors to increase their desire to use futures and private securities investment assets, in particular.

“Notably, the new measures have taken out a previous requirement that any trading into financial futures must be done for hedging and not for speculation purpose, leaving room for the relevant futures exchange to promulgate its own rules. This would also mean that it has become possible for investors to invest into certain products that trade financial futures not only for hedging but also for speculation purposes,” Yang said.

Although this will be subject to further interpretation by the relevant futures exchanges, she expects the change in requirement to have a significant impact on certain asset classes. Even though China has some unique rules for futures trading; as one of the biggest futures markets in the world, we believe trading volume will rise after investors have fully understood those rules, she said.

Based on China's usual practice, regulators should be announcing the specific trading rules soon, possibly in a few months, Yang added.

LINGERING CONCERNS

Michael Wu,

Northern Trust

Wu at Northern Trust also expects rising interest for derivatives. “There has been a lot of interests in financial derivatives products, as they allow investors to effectively hedge and manage their market risk. The new measures no longer require financial futures trading to be conducted for hedging purposes only,” Wu echoed.

However, he remains cautious about the growth potential of the new combined scheme, particularly given that there alternative investment avenues into China exist.

“Since the introduction of the Stock and Bond Connect schemes, QFII/RQFII schemes have gradually lost their appeal as the Connect schemes have delivered the necessary scale and ease of access to foreign investors. However, we continue to see steady increases in foreign ownership of Chinese stocks and bonds over the past few years,” Wu noted.

He added that the current geopolitical tensions had introduced uncertainties at least for the short term, but China’s growth potential remains promising for the long term.

“While the application process has been simplified significantly, QFII/RQFII will still face a lengthy account opening process where they need to select a local custodian and complete contract negotiations and other documentation requirements,” Wu said.

Yang agreed. “The market may need some time to digest the new measures before seeing a higher level of investment access.”

China’s gradual liberalisation of its growing capital markets have also led to its increasing inclusion in global benchmarks. In late September indices provider FTSE Russell announced that it would include Chinese government bonds in the FTSE World Government Bond Index starting in October 2021.

Effective since the start of this year, the newly commenced Foreign Investment Law has shown the country’s ambitions to attract outsider investors, providing more flexibility on joint ventures terms and streamlined entity establishment procedures.

China launched the QFII regime in 2002 and the RQFII regime in 2011, allowing foreign institutional investors to trade in the country’s stock and bond markets under specific quotas which were removed in May this year. For QFII, a total of $116.2 billion was granted to 295 qualified institutional investors. For RQFII, a total of Rmb 722.9 billion ($105.9 billion) was granted to 230 investors, as of May 29, according to SAFE website.

(The major changes under the new rules are listed below:)