The People’s Bank of China (PBOC) last week issued technical guidelines for investment in domestic securities by Renminbi Qualified Foreign Institutional Investors (RQFII).
The guidelines include a relaxation of the parameters for RQFIIs, which were launched at the end of 2011. Importantly, it requires that foreign investors in the China interbank bond market should appoint a custodian that is a licensed settlement agent in that market.
In accordance with the new rules, RQFIIs shall open one RMB Basic Deposit Account of offshore institutions. After opening the Basic Deposit Account, RQFIIs should appoint the onshore commercial bank who is qualified to be the custodian bank of the qualified foreign institutional investors and apply to open separate Special Deposit Accounts for settlement of funds for transactions at China Interbank Bond Market and stock exchanges with the RQFII custodian bank(s) respectively. If the RQFII would like to trade index futures, a separate Special Deposit Account for index futures trading should be opened with Futures Margin Depository Bank.
The latest revision completes the overall regulatory framework for RQFII schemes. The China Securities Regulatory Commission (CSRC) revised the RQFII license requirements in March, relaxing the requirements so as to allow global asset managers with registered subsidiaries and principals in Hong Kong, a major offshore yuan markets through which yuan funds can be obtained, to apply for the licenses.
Fund companies with a type 9 license are eligible to apply for the RQFII following by the CSRC approval. For purposes of regulating the pilot program of RQFIIs investing in domestic securities, relevant issues to implement the Pilot Measures on Investment in Domestic Securities by Renminbi Qualified Foreign Institutional Investors, the PBOC and the State Administration of Foreign Exchange (SAFE) is also responsible for regulating and granting the quotas for the renminbi scheme.
“The passing of the technical standards is a significant step for global custodians and sub-custodians in the region as they will have the chance to service a larger number of eligible investors that want to access the China market through the RQFII scheme,” said Sophia Chung, head of Client Services for Sub-custody and Clearing, China, HSBC. “As of March this year, of the RMB270bn quota that has been granted by the State Council, only RMB70bn had been allocated. The relaxing of the rules to include foreign institutions will allow eligible investors to utilize the remaining RMB200bn of the quota.”
The scheme is understood to have gathered significant momentum from foreign financial institutions who are applying for licences following the revision with the regulator currently reviewing new applications.
“Our observations show strong interest from overseas companies. Global asset managers that are registered in Hong Kong and have their principal business there are preparing to apply for the license. We are in close contact with some of the eligible investors and assisting in the preparation of license applications,” said Chung. “These include some UK entities with HK subsidiaries. They are already prepared and submitted their application based on the rules. Over the next two months (providers have until July to submit their applications) providers need to have structured plans to submit to the regulators. Chinese banks have already submitted their applications. We have submitted a few applications on behalf of foreign clients and a lot of applications are still under review.”
Chung expects the RQFII custodians’ services model will generally replicate the services model used for the QFII scheme, and investors will expect sub-custodians to provide the same full range of services for RQFIIs.
“As a global bank, HSBC has secured 46% market share in servicing the first and second batch of RQFII products,” she said. “It is also the first foreign bank to be granted a settlement agency license, which facilitates settlement for RQFII investors who invest in fixed income in the Chinese interbank bond market. This is an important differentiator as PBOC has stated in its RQFII rules that those investing in the China interbank bond market should appoint a custodian that is also a licensed settlement agent in the interbank bond market.”