CSRC hints it may break $1 billion QFII cap

A subsidiary of sovereign wealth fund QIA is tipped to be the first to receive more than $1 billion in QFII quota after the regulator acknowledged it was considering raising the cap.

Speaking at a media briefing this week, an unnamed officer from China Securities Regulatory Commission (CSRC) admitted for the first time that it could increase the cap to cater to long-term offshore investors.

The decision, which would be made in conjunction with the State Administration of Foreign Exchange, is likely driven by the investment needs of sovereign wealth funds in the interbank bond market, which makes up over 90% of China’s outstanding bond market issuance.

Cindy Qu, an analyst at Shanghai-based consultancy Z-Ben Advisors, notes that the interbank bond market requires large investments. “Their quotas might be sufficient to invest in the equity market, but to invest in the interbank bond market they definitely need more quota,” she says.

Qu anticipates that the cap will be raised soon, after the CSRC moved this July to allow QFII licence holders to invest in the interbank bond market.

The CSRC official confirmed that Qatar Holding, which received its QFII licence in September, had applied for a $5 billion quota, Chinese media reported.

While he did not indicate whether it would be granted the full amount, the application alone smashes the previous highest single quota: $700 million awarded to both the Hong Kong Monetary Authority and Temasek Fullerton Alpha in July and October this year, respectively.

Already these two overseas entities along with the Government of Singapore Investment Corporation and Norway’s central bank have hit the $1 billion QFII cap via several quotas.

The CSRC official did, however, say that applications for quotas above $1 billion would be evaluated on a case-by-case basis.

Previously, AsianInvestor has reported that the CSRC might introduce a two-tier system in which its quota cap would be lifted for large global long-term investors, allowing the likes of sovereign wealth funds and pension funds premier access to China’s capital markets.

The qualified foreign institutional investor (QFII) scheme was introduced in 2002, at which time the quota cap was $800 million. That was subsequently raised to $1 billion in 2006. Up until now the majority of quotas have ranged from $100 million to $300 million.

Qatar Holding was founded by the Qatar Investment Authority in 2006 and invests both locally and internationally in private and public equity and other direct investments.

Separately, the CSRC has approved seven more QFII licences this month, including JP Morgan Asset Management (Taiwan), Aegon US, CDH Investment Singapore, SEB Group and Harvest Global Investment, local media report. That would mean there are now 199 QFII licence holders.