More clarity provided on new RQFII quota system

Following the unveiling of a new quota system for the renminbi qualified foreign institutional investor (RQFII) cross-border scheme early this month, industry players were unsure whether the country-by-country RQFII quota limit was still in place and what asset base the offshore arms of Chinese fund houses should use to calculate their new quota. 

An industry veteran close to China’s State Administration of Foreign Exchange (Safe), which regulates the quota system, told AsianInvestor that the country quota limit was still in force.

Hence asset managers under the RQFII scheme in Hong Kong will still need to find other ways of accessing additional quota, as the city hit its Rmb270 billion ($40 billion) quota cap in 2014. As a result, even if a Hong Kong RQFII manager is due more quota under the new rules, it cannot yet apply for more.

There are potentially two ways to solve this issue, the unnamed veteran said. Most global fund managers have two domiciles – Hong Kong, plus typically London, Luxembourg or Singapore – so they can use the other domicile’s quota.

A second option for accessing mainland assets is to use other cross-border investment schemes, such as the Shanghai-Hong Kong Stock Connect or the China interbank bond market (CIBM) programme.

Meanwhile, added the executive, Chinese fund managers’ offshore businesses can only use their Hong Kong assets under management – not those of the mainland parent* – to calculate the base quota. Foreign houses use their group AUM to calculate the quota**.

Whether the Chinese firms use their mother company's or Hong Kong arm's AUM for the calculation is important. If they base it on the parent’s assets, the difference between Chinese and foreign fund houses’ quotas would be huge, said David Li, chief executive of CACEIS Hong Kong Trust Company. CACEIS is an asset-servicing bank owned by French Crédit Agricole.

As for foreign asset managers which plan to issue exchange-traded funds linked to China indices, the quota size is crucial, given the importance of liquidity for ETF products, Li told AsianInvestor.

China has granted RQFII quotas to 17 countries, with Hong Kong holding the largest (see table below). The new rules mean licence-holders will automatically receive quota based on a percentage of their AUM. Previously, individual institutions had to apply for RQFII quota on a case-by-case basis, with the overall amount capped by the limit for their region.

Safe did not respond to AsianInvestor’s queries by press time.

* 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 as of the end of the previous year, minus any QFII quota.

** For RQFII holders or their parent firms whose assets are mostly invested outside China – such as foreign asset managers – the initial quota is $100 million plus 0.2% of average AUM during the previous three years, minus any quota under the QFII scheme. (QFII is the dollar-denominated equivalent of RQFII.)

Table: RFQII scheme and holders, as of August 31, 2016