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Global Custodian: What distinguishes the QFI scheme from the other channels available for foreign investors to access China?
Anastasia Aurol: China is unique as there are many routes for foreign investors to access its onshore capital markets. Every channel has been designed to cater to investors with different needs and they all have their advantages. What makes the QFI scheme stand out is that it provides investors access to the broadest range of asset classes and financial products. The recent relaxation measures have made it even more appealing. Regulators expanded the investment scope to include instruments such as bond repo, commodity futures, margin financing and securities lending. In addition, QFIs now have the ability to invest in private investment funds, so this has contributed to the surge in interest.
Josephia Feng: China has been further opening its capital markets and lowering the barrier to entry for offshore capital. We have seen increasing demand from global asset managers looking to access the China onshore market since the QFI program originally was announced in 2002;. Further waves of investor interest have been driven by not only ongoing developments in the QFI program itself; but also thru complimenting channels such as Stock and Bond Connect. The growth in institutional participation directly in QFI is partly due to the attractiveness of the onshore Chinese equity market. With over 3,600 companies listed on the mainland exchanges, compared with 1,200 offshore, investors have a wider selection of stocks to choose from. The markets have also outperformed— the CSI300 was up about 36% in 2019 and about 27% in 2020. Another key factor contributing to the rise in institutional participation is the inclusion of China bonds and equities in the global indices.
GC: Following these major reforms, what have been the implications for investors?
AA: The QFI scheme is now viewed as a more accessible investment channel; particularly amongst alternative asset managers. While we observed an uptick in investor interest when the initial reforms were announced in May 2020, investor appetite significantly increased when further reforms were announced in September. At HSBC, we saw a spike in applications being submitted soon after the new rules took effect, and are also seeing license approvals being granted at a faster pace. The CSRC approved 19 new QFIs in November and 26 in December[1] – a substantial growth compared to prior months. We are also seeing these applicants comprised of unique categories: alternative asset managers interested in the expanded investment scope, smaller-sized investors who previously did not meet the qualification criteria, and investors who prepared their application some time ago but opted to submit in November due to the shorter review cycle. As the application process has been streamlined, we are encouraging all managers who invest in China to explore a QFI application either as an extension of their existing strategy or to future-proof their business in expectation of further market developments.
JF: In addition to broadening the scope of traditional asset classes available to license holders, QFI’s can now invest in the private fund space. This has prompted a growth in the number of foreign investors seeking to gain access to onshore managers. We have seen a specific demand for access to Chinese quant funds and long-only equity funds; particularly given the outperformance of these strategies over the past two years. It is also important to highlight that investors are executing on their China growth strategy by building out their presence in the market. They are hiring talent – both onshore and offshore – who understand the landscape, intricacies of the local market and cultural nuances.
Despite the positive developments, being a new venture, there must still be questions and concerns that asset managers come to you with. What are some of the most common and how do you address these?
AA: The concerns from investors can vary depending on the type of strategy, the structure of their investment manager, or the region in which they are headquartered. Generally speaking, managers are intent on preparing a robust application, keen to understand what the regulators are looking for, while keeping up with the evolving regulatory requirements.
My advice to investors seeking a smooth application experience is to research the requirements far in advance and have an internal team dedicated to the QFI set up effort. Expectations need to be managed, as this is not something where a manager can commence the documentation tomorrow and be in a position to start trading in a month. While the CSRC application is an essential part of the set up process, your team can work on other components in tandem, such as negotiating custody agreements, completing KYC and appointing a local broker, such as HSBC Qianhai. All this will ensure the fastest time to market.
What should investors be aware of when considering a QFI application?
JF: Appointing an experienced custodian is critical; preferably one with a robust track record of servicing QFIs. Potential QFI applicants should also evaluate the broader benefits and economies of scale that can be achieved by selecting an institution which has the ability to service their strategy across both the onshore and offshore channels to access the China market. In addition, seamless collaboration between the service provider’s custody and brokerage teams is key.
How is HSBC able to support investors utilising the QFI scheme
JF: We are a one-stop shop. HSBC has a long history in Asia, particularly China. Furthermore, we established our majority-owned securities company— HSBC Qianhai— in December 2017 and have been focused on continued growth of our capabilities domestically.
If you are a global investor looking to apply for a QFI licence, HSBC will work with you in lock-step on the application, and set up your global and onshore custody accounts to safe keep your assets. With HSBC Qianhai serving as your onshore broker for execution, you can leverage our strong expertise in onshore IPOs, Private Placements and the broader capital markets.
For alternative managers, we have the ability to integrate QFI custody into our Prime Brokerage offering which puts us in a market leading position. We are also exploring a financing solution that would enable clients to access leverage, which we know is an important component of being able to successfully implement some strategies.
AA: The four areas that I believe distinguish our support are— expertise, service, innovation and market advocacy. At HSBC, our clients benefit from a global coverage model, where teams across New York, London, Hong Kong and China assist with the set up process and manage operational queries once live. In addition to being assigned a service manager in China, our clients also have access to dedicated China desks in New York, London and Hong Kong to cover all time zones.
We take pride in being at the forefront of new solutions to support investment demand in China. For example, soon after the new rules were released, we facilitated the first securities lending, short-selling and margin financing transactions in the market, along with the first onshore private fund investment via the QFI scheme. HSBC proudly serves 214 of 558 QFI applicants, so we have a wealth of experience to offer. The numbers speak for themselves.
[1] November & December 2020 QFI Approvals: http://www.csrc.gov.cn/pub/zjhpublic/G00306205/201511/t20151106_286098.htm