The China securities regulator is considering allowing for an increase in the investment quotas for Renminbi Qualified Foreign Institutional Investment (RQFII) and Qualified Foreign Institutional Investment (QFII) schemes.
Guo Shuqing, chairman of the China Securities Regulatory Commission (CSRC) was recently quoted saying that they are considering expanding the size of inflow investment into China and allowing foreign financial institutions to hold 10% of market cap in China, potentially as much as $300billion. Though no timeframe was given for this expansion it would mean the current investment quotas for Renminbi Qualified Foreign Institutional Investment (RQFII) and Qualified Foreign Institutional Investment (QFII) would increase nine or 10-fold from where they are today.
Securities services providers have welcomed the development. Andy Ng, head of HSBC Securities Services China said: The fact that the CSRC made that comment suggests they have looked at this seriously but it could be six, 12, 18 months or longer before those quotas are released.”
Banks need to have a long-term commitment to the market. The fact that this has materialized is a huge development and is a result of pilot programs launched in the past and regulators getting more comfortable with allowing more cross-border investments. In terms of direction it means the further opening up of the Chinese market.
The RQFII was launched at the end of 2011, while the first QFII was trademarked in 2003. The RQFII is similar to the QFII in that it allowed investors using many currencies investing to tap into China. The QFII in the past had stringent criteria for fund managers to invest: they had to have $50 billion in assets under management before they could apply for the $4 billion of quotas. These quotas were increased to $30 billion in 2007. The Qualified Domestic Institutional Investor (QDII) scheme was launched in 2007 in the domestic market for investors overseas to allow managers to package funds in China to target the outflow business. QDII allows for fundraising by overseas fund managers to enter China to perform thefundraising.
In 2012, the QFII was launched with quotas ranging from $30-80 billion, while the RQFI had quotas of RMB70 270 billion. In the same year, the Qualified Domestic Limited Partnership (QDLP) was launched. With the QDLP the investment houses come into China to do the fund raising and invest outside China. In addition to the QFII quotas increasing, the length of the approval processes has decreased, from 18-24 months to six months.
The nature of the regulation is such that its much faster to get a quota now and much easier if you are a long-term investor like a central bank, sovereign wealth fund or pension fund,” said Andy Ng.
Of the total available quota of $80 billion, CSRC and State Administration of Foreign Exchange (SAFE), the State Administration of Foreign Exchange, have so far approved 207 QFIIs or $37bn as at the end of 2012.The size and opportunity will increase with the approvals process getting quicker, said Ng. The direction is positive.The QFII approval process involves detailed procedures of up to 10 documents per application. The majority of documents still have to be inputted in the right tone and language, so local knowledge is invaluable. However, the CSRC revised the QFII rules to be more flexible. There were 29 approvals in 2011, which increased to 72 in 2012 in terms of the total number of successful applications. Funds in the past had to have $5 billion in AUM. Now they need only $500 million so the market has reducedits barriers to entry, explained Ng.
QFII license holders include Norges Bank ($1 billion), Temasek Fullerton Alpha Pte Ltd ($1 billion), Morgan Stanley & Co. International ($600 million), Canada Pension Plan Investment Board $600 million, Abu Dhabi Investment Authority ($500 million), Merrill Lynch International ($500 million), Goldman Sachs Asset Management ($500 million), Morgan Stanley Investment Management Inc. ($450 million), JPMorgan Chase Bank, N.A. ($400 million) and Bank Negara Malaysia ($400 million).
(JDC)