Pending RQFII changes to give managers freedom: sources

Chinese authorities are understood to be preparing changes to the RQFII programme that would grant fund managers more freedom in how they allocate their quotas.

It is believed that the alterations would see general quotas awarded to firms for mutual fund and segregated account businesses, rather than specific products, as currently.

China’s State Administration of Foreign Exchange (Safe) is set to announce the new guidelines very soon, with sources suggesting it could be as early as this month.

Safe held a three-hour meeting with fund managers and custodian banks on May 20 in Beijing to discuss amendments to the use of RQFII quotas.

“The regulator wants to better utilise the RQFII [renminbi-denominated foreign qualified institutional investor] quota,” said one source. “It has a very detailed plan in mind.”

Once the new guidelines come into effect, RQFII fund managers will have greater flexibility in using their quotas.

Presently, licensed firms applying for RQFII quota must first submit a product plan for approval. If successful, a quota is decided on and awarded. An A-share exchange-traded fund, for example, usually receives a quota of Rmb1.5 billion to Rmb2 billion.

However, if the fund experiences outflows, fund managers cannot fully utilise their quota.

As of this May, Safe had handed out Rmb210 billion ($33.6 billion) in quotas, but only Rmb90 billion, or 43%, of that had been used.

“The approved RQFII quota is not fully utilised,” noted one Chinese fund manager. “There are hundreds of new products which Safe has to review for quota application. It is a very time-consuming process for both regulators and fund managers.”

Although Safe allows fund managers to switch their unused quota to other products, managers must submit an application to the regulator, which usually takes one to two months.

In February, Harvest won approval from Safe to re-allocate Rmb2 billion to a London-listed RQFII ETF from the Rmb5 billion quota it had initially been awarded for its MSCI China A ETF.

“The new guidelines will give much more flexibility for us to develop products as we will be able to switch quota from one to another with no need for regulatory approval,” said another Chinese fund manager.

When RQFII was launched in 2011, quotas were allocated to firms equally. The first pilot batch went to 20 firms. Eleven of them were Hong Kong asset management arms of Chinese securities firms, and nine were Hong Kong arms of Chinese fund management firms.

The former were awarded Rmb900 million each, and the latter Rmb1.1 billion each, except ChinaAMC, which received Rmb1.2 billion

In the second phase of the programme, launched in April 2012, quota was awarded to ETF providers.

In the third stage, starting in 2013, the program was expanded and investment constraints were lifted further.