RQFII programme extends to London and Singapore

China's regulatory commission will expand its renminbi qualified foreign institutional investor (RQFII) programme to institutions in Singapore and London.

These mark the latest cities after the China Securities Regulatory Commission extended the programme to Taiwan in June.

CSRC also announced plans to further increase the total qualified foreign institutional investor (QFII) quota to $150 billion from $80 billion in an effort to encourage foreign investment into the mainland.

"Expanding the RQFII pilot programme to London, Singapore and other places will help the development of the offshore RMB market," the CSRC, People’s Bank of China and the State Administration of Foreign Exchange said jointly in a statement Friday, without naming any other destinations or offering details of what the quotas for Singapore and London will be.

It represents yet another important move towards the internationalism of China's currency, notes Chi Lo, Greater China strategist at BNP Paribas.

"When there are more investment products available in overseas markets, investors are willing to hold more RMB and thus, increasing the international acceptance of RMB," Lo tells AsianInvestor.

Hong Kong is now the largest offshore RMB market with a total of Rmb698.5 billion ($113.8 billion). Taiwan investors began renminbi-denominated transactions in February, although so far, Chinese regulators have not yet granted any licences or quota to Taiwanese institutions.

The RQFII programme, which was introduced in 2011, allows Chinese fund managers with Hong Kong subsidiaries to directly invest in Chinese stocks and bonds using renminbi. It was extended to financial institutions domiciled in Hong Kong this past March. Through June, there have been 37 RQFII licenses granted to institutions, with Rmb104.9 billion quota handed out thus far.

Institutions in London, Singapore and Taiwan seeking to partake in the RQFII programme will need to comply with regulations already in place for Hong Kong institutions, according to the CSRC.

Some market participants have already begun to speculate that Friday's announcement will lead Hong Kong to lose its edge as the world's choice RMB offshore centre, although most agree that Hong Kong will not face immediate competition.

Lo notes that while adding cities to the RQFII programme will inevitably increase competition for Hong Kong institutions, as Hong Kong was the first to move into the RQFII business, the infrastructure is already in place and streamlined.

"Hong Kong will remain the big brother in the market. There may be more cities [to receive] the RQFII programme, [now] Singapore and London, and even Tokyo and New York, but they will be satellite cities connecting to the prime Hong Kong centre," Lo says.

Hong Kong’s proximity to the mainland offers it a distinct advantage over other cities, adds Yim Fung, president of the Chinese Securities Association of Hong Kong, as fund managers seeking investment opportunities often want to visit the companies.

In addition to creating healthy competition amongst the offshore RMB centres, Raymond Yeung, Greater China senior economist at Australia and New Zealand Banking Group (ANZ) argues that they will also complement each other, noting that Singapore can serve Southeast Asian investors while London opens the door for European and American institutions looking to invest in China using its currency.

The CSRC also announced plans to double its QFII quota to $150 billion in an effort to spur more offshore investment into the mainland, which has been experiencing a turbulent couple of weeks after China's central bank raised interest rates to curb lending earlier in June.

"Starting from the beginning of the year, there has been Rmb60 billion QFII capital inflow, and a further expansion of the total quota to $150 billion can help attract move offshore long-term institutions into the market, which fosters capital market development," the CSRC says in a statement.

Shibor rates hit a record 13% on June 24, with the People's Bank of China doing little to pump liquidity back into the markets as it attempts to curb risky lending. Local stock markets have experienced volatility since, with Shanghai's CSI300 down almost 7% year-to-date through Friday. Although the PBoC has said it will provide the necessary liquidity to banks, participants don't anticipate they will inject liquidity on a large scale, and expect small and medium term financials will feel the squeeze near-term.

At the moment, QFII and RQFII account for only 1.6% of the total A-share market cap.