Who wins from China's QFII quota increases?
International asset managers are preparing to apply for the expanded quotas for China's qualified foreign institutional investor (QFII) scheme and its renminbi-denominated equivalent (RQFII), but the opening will benefit only some.
Last week the China Securities Regulatory Commission (CSRC) said it would increase the total quota for the QFII scheme to $80 billion from $30 billion. At the same time, it released a second batch of RQFII quotas of Rmb50 billion ($7.92 billion), which will be used for A-share exchange-traded funds (ETFs) listed in Hong Kong.
“Even though the additional $50 billion QFII quota and Rmb50 billion under RQFII are not significant amounts for the A-share market, they still have a positive impact,” says Shenzhen-based Da Cheng Fund Management.
Unlike the first batch of RQFII quotas (Rmb20 billion released last December), which were shared by 21 Hong Kong subsidiaries of Chinese fund managers and securities firms, the second batch will only be granted to a few experienced managers.
“We have been preparing for this product for many months and we are confident we will be one of the managers to get the RQFII ETF quota,” says Michelle Chua, regional head of business development at Harvest Global Investors, the international arm of Beijing-based Harvest Fund Management.
The existing A-share ETFs offered in Hong Kong are mostly synthetic (swaps-based) products, but RQFII will broaden the range of physically backed products.
The new ETFs will directly invest in A-shares, explains Chua, so that “there will be no counterparty risk, no p-note [participation note] cost and no foreign exchange difference, as the ETF currency denomination [in renminbi] is the same as [that of] the underlying investments".
Harvest FMC and Huatai Pinebridge were the two managers that jointly launched the CSI 300 ETF, the first cross-market ETF tracking stocks listed on both the Shanghai and Shenzhen exchanges.
The CSRC will take the RQFII pilot scheme to the next level by expanding its scale, allowing more types of financial institutions to participate and more flexibility in terms of asset allocation.
For the QFII scheme, the previous ceiling was lifted from $10 billion to $30 billion in 2007 after the China-US Strategic Economic Dialogue took place. The increase of $50 billion this time is hailed by local media as “unprecedented”.
Since the QFII scheme commenced in 2003, the CSRC has granted licences to 158 foreign financial institutions from 23 countries and regions. They include 82 asset managers, 11 insurance firms, 23 commercial banks, 13 securities companies and 29 other institutions, such as sovereign wealth funds, pension funds and endowment funds.
The CSRC says 129 out of the 158 qualifiers have obtained a total of $24.5 billion in QFII quotas. As of March 23, 74.5% of the assets in the QFII accounts were invested in the domestic stock market, 13.7% in bonds and 9.6 % in bank deposits. The total holding of QFIIs counts for 1.09% of the market capitalisation of domestic A-shares.
Z-Ben Advisors views the latest changes as “unambiguous signals of China's intent to attract more offshore investors and a sign that market investments will play a key role in the government's plan to internationalise the Rmb".
The Shanghai-based consultancy suggests that, in the short term, asset managers in the QFII application queue should expect accelerated approvals.
Regulators have already upped the pace of approvals since the end of last year. In March, the State Administration of Foreign Exchange granted a record $2.11 billion of quotas to 15 companies, compared with a total quota of $1.87 billion handed out during 2011.
“The QFII programme enhances our experience of monitoring cross-border securities investment and capital flows,” the CSRC says. “The QFIIs, mainly overseas long-term value investors, have diversified the domestic investor structure, upgraded the quality of listed companies and promoted the international recognition of domestic capital markets.”