The China Securities Regulatory Commission (CSRC), confirmed on Friday last week that the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes, which are the primary investment channels for foreigners seeking exposure to the mainland, will no longer require licensees to invest at least half of their funds into stocks.
The lifting of this key investment allocation requirement for foreign investors suggests Beijing is pushing ahead with the liberalization of the country's capital markets. The two schemes are used by the vast majority of exchange traded funds (ETFs) and structured products providers that offer overseas investors exposure to mainland China markets, and the removal of the investment requirement will allow for greater operational capacity and more tailored product offering.
With the change, QFII money 'stuck' in equities will be able to flow into their preferred asset class, which is fixed income, according to Matthew Wong (pictured), chief operating officer at KGI Asia.
"The removal of the QFII equity investment requirement is welcomed, as it will help existing QFII asset managers better utilize their funding," he said. "However, I don't think it will draw another round of fresh money to the QFII scheme."
The RQFII scheme is the preferred avenue for equity investments by foreigners, as money remittance in renminbi is a lot easier as compared with USD-denominated QFII, where capital withdrawals can take between nine and 18 months, said Wong, adding that a switch to more debt may exert some pressure on A shares, but markets will likely absorb the shift in the relatively small proportion of foreign capital on mainland markets.
According to data from China's foreign exchange authority, the State Administration of Foreign Exchange (Safe), as of September 29 the QFII quota stood at US$81.74bn, while the RQFII quota was RMB 511.34bn (US$76.62bn).
The move comes as markets are preparing for another major change in China's efforts to open up to foreign investment - the launch of the Shenzhen-Hong Kong stock connect, which is expected in late November. China's capital markets liberalisation is expected to prompt MSCI to include A shares in its Emerging Markets benchmark, which is tracked by an estimated US$1.5tn, in the coming months.
Vanguard, the world's second-top asset manager, last month switched to a new underlying index for its emerging markets ETF, which now includes exposure to mainland stocks.
The regulator's move follows a more restrictive framework introduced by the CSRC for wealth management products in China limiting the amount of leverage that can be used on structured debt notes as well as restrictions to prevent money borrowed by investors inflating the country's equity and bond markets.
The new rules also include provisions to prevent potential conflicts of interests and avoid the breach of restrictions around the Qualified Foreign Institutional Investor (QFII) threshold, and prohibits inducements and the use of words such as 'expected return', 'expected income', 'guaranteed', and 'zero risk', among others in marketing materials. The aim of these provisions is to standardise the behaviour of sales representatives.
As the new guidelines were released last week, Shang Fulin, the head of the CBRC warned of the dangers around credit risks related to China's banks aggressive push into investment products.
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