CSRC poised to unveil new rules for RQFII 3

China’s securities regulator is to set out rules for the latest incarnation of its RQFII programme following the Rmb200 billion expansion plan it unveiled late last year.

According to a well-placed source in Beijing, the new requirements surrounding “RQFII 3” will be announced very soon, potentially before the Chinese New Year.

The source indicates that firms qualifying for RQFII licences and quota from here on will be required to submit their products for approval first and will be granted an appropriate quota in accordance with that product’s features and profile.

This would appear to be a drive by the State Administration of Foreign Exchange (Safe) to eliminate unused quota.

The renminbi-denominated foreign institutional investor (RQFII) programme was launched in December 2011 to allow the Hong Kong subsidiaries of mainland fund managers to invest back into the onshore securities market.

An initial quota of Rmb20 billion was permitted, with regulations stipulating that no more than 20% would be invested in equity and no less than 80% in fixed income.

That was then expanded in April last year by Rmb50 billion, with RQFII permit holders allowed to deploy their quotas into exchange-traded funds.

And late last year the chairman of China Securities Regulatory Commission (CSRC), Guo Shuqing, announced plans for a Rmb200 billion expansion of the scheme, in a move billed as RQFII 3. Of this, the source suggests as much as Rmb100 billion will be set aside for bond funds.

However, not all of the initial Rmb20 billion amount was fully used up. While China AMC (HK), E fund (HK) and Harvest Global Investments all saw their RQFII quotas fully subscribed (the first two were granted an extra Rmb800 million each for fixed income funds last month), several firms saw their products receive a lukewarm response from investors and some only used up a third of their quota.

According to the source, any unused quota for RQFII 3 will have to be returned to the regulator and will then be reallocated to other qualified fund providers.

This would bring the RQFII scheme in line with the present practice for qualified foreign institutional investors (QFIIs), which have to allocate their quota in the domestic market within two years; thereafter unused quota is returned to the regulator.

But for the initial RQFII batch, it is understood the CSRC has no plans to claim back retrospectively unused quotas from those firms which qualified.

Only last week, Guo announced a further opening up of its RQFII programme, this time to Taiwan. It is piloting the RQFII 2 programme to include both institutional and retail investors, with an initial quota of Rmb100 billion.

Further, qualified Taiwanese securities firms will be allowed to hold up to a 51% equity stake in a joint-venture asset management firm set up in Shanghai, Fuzhou or Shenzhen.