HK fund firms urged to use foreign RQFII quota

Nov 3, 2014

The deputy CEO of Hong Kong’s securities regulator said asset managers in the city should make use of offshore quota, as the city awaits an increase in its RQFII limit.

Asset managers in Hong Kong should partner with overseas firms with renminbi qualified foreign institutional investor (RQFII) quota, said Alexa Lam, deputy head of the city’s securities regulator, at a forum yesterday.

Local fund houses are lobbying to see Hong Kong’s RQFII quota expanded, after the city hit its limit of Rmb270 billion ($44 billion) in October. But only 3% of the total Rmb470 billion RQFII quota across Singapore, the UK, Paris, Germany, Taiwan and South Korea has been utilised, so there’s still plenty available, noted Lam, speaking at the annual conference of the Hong Kong Investment Funds Association.

RQFII quota granted to one jurisdiction does not have to be used in that jurisdiction alone, she said. In fact, the Securities and Futures Commission has supported use of Hong Kong RQFII quota by local managers to launch funds in New York or London.

“I understand some of you are lobbying the mainland authorities to further expand the Hong Kong RQFII quota,” said Lam. While the process for quota expansion for Hong Kong is under way, she added, the industry should start looking into how it could work with players in other markets that still have plenty of quota.

To ensure that Hong Kong functions properly as an offshore renminbi centre, there must be a healthy velocity of renminbi transaction volume on a global scale, said Lam.

It is understandable that the Chinese authorities are reluctant to lift the cap on Hong Kong's RQFII quota, because not all of it has been used, said Chris Powers of Shanghai-based consultancy Z-Ben Advisors.

Some Hong Kong firms are either conducting private placement, and that may be one reason why regulators are hoping to see the utilisation rate go up before raising the cap, he told AsianInvestor.

Powers argued that it made a lot of sense for Hong Kong firms to collaborate with overseas firms holding RQFII quota because of the former group's experience in Greater China.

He saw the potential for partnership as similar to that for RQFII exchange-traded funds (ETFs) launched in London and New York, whereby Chinese firms design the products and their overseas partners take care of distribution.

A lot of the RQFII products distributed overseas are ETFs, added Powers. The next wave would be products that are more specially designed, such as active equity or even fixed income, he said, and these require managers being based in Hong Kong or China.

He expects to see Hong Kong subsidiaries of mainland Chinese firms, such as CSOP and Harvest, being approached by more foreign firms for partnerships.

“What we’re after is mainland expertise,” Powers said. “While Hong Kong firms know more than Paris or London firms, they wouldn’t know more than mainland firms.”

He added that international fund houses in Hong Kong may be hesitant to entertain partnerships because they have long-term interest in building out capabilities in the city and in mainland China. Hence small and mid-tier firms would be the best choice for overseas managers with RQFII quota seeking RQFII tie-ups, he suggested.