SSgA calls for change to QFII rules

State Street Global Advisors (SSgA) has called for QFII rules to be modified to create a level playing field between mainland Chinese, Hong Kong and foreign ETF operators.

The call came as the second physically backed A-share ETF was launched on the Hong Kong stock exchange yesterday under the renminbi-denominated qualified foreign institutional investor (RQFII) scheme.

Chinese asset manager E Fund’s CSI 100 ETF recorded trading volume of HK$14.8 million ($1.9 million) on its Hong Kong debut, despite the Shanghai Composite Index hitting a 41-month low of 2,055.71 points yesterday, having sunk 1.75% during the day’s trading.

Further, CSOP is set to list its FTSE China 50 ETF in Hong Kong today. Both E Fund and CSOP had seen their two products fully subscribed by institutional investors by last week, having received a combined quota of Rmb7 billion.

Frank Henze, Asia-Pacific head of ETFs at SSgA, says the interesting thing about RQFII is that it is more flexible than the traditional QFII regime, making the management of a physical ETF possible. “We look towards changes in the QFII arrangements to be able to participate in the A-share market in a physically replicating form,” he says.

He explains that QFII quotas are traditionally awarded in sizeable amounts which may be too large for ETFs at launch.

“Existing A-share synthetic ETFs use derivatives because investment banks break down the QFII quota into smaller units that can be consumed by the market over time,” he adds.

“Because investments into funds including ETFs grow over time, the RQFII arrangement allows for this accumulation without losing your quota or being penalised.

“The flexibility of the RQFII regime sets a precedent for offshore asset growth into the China market over time rather than consuming a sizeable quota at once.”

Francois Guilloux, regional sales director at Z-Ben Advisors, says from a Chinese regulator’s perspective, the QFII programme was launched to raise overseas investors’ awareness of the A-share market quickly, while RQFII was created to facilitate Chinese asset managers to build international business over time.

“We hope that the QFII regime will apply similar rules and flexibility to enable a more level playing field between the mainland Chinese operators and ETF operators in Hong Kong,” adds Henze.

At the same time, Henze sees the emergence of RQFII A-share ETFs as a positive development for investors globally, allowing access to the China market and its currency through a flexible instrument without the counterparty risk and opacity of a derivatives-based fund.

“It is a big step forward as it normalises the way overseas investors invest in the A-share market as in any market people invest in physical forms,” he says.

Jane Leung, head of iShares Asia-Pacific, says there has been renewed interest from foreign investors in ETFs that access China, with sector investing gaining in popularity.

“While the H-Share market is simply not representative of the total Chinese equity market, ETFs allow foreign investors to express their market views through diversification, avoiding the risks that come with picking an individual stock position.”

Mark te Riele, deputy CEO for Asia-Pacific at BNP Paribas Investment Partners, said late last week that the only real risk assets he sees investors buying into in fund form are China ETFs.