Acceleration in QFII quota tipped for fourth quarter 2010

Safe handed out $1.3 billion in QFII quotas in the third quarter, the highest three-month figure in two years. Z-Ben Advisors suggests it may be playing catch-up after a slow year.

China’s foreign exchange regulator handed out $1.3 billion in qualified foreign institutional investor (QFII) quotas in the third quarter this year, its highest three-month tally in almost two years. 

There was a rare bias towards existing players, notes consultancy Z-Ben Advisors, with six of the 10 firms granted a quota having already invested through the channel and accounting for 70% of the total. Overall, the QFII quota at this point stands at $18.9 billion. 

But Francois Guilloux, director of regional sales for Z-Ben, says this should not come as a surprise given that China’s State Administration of Foreign Exchange (Safe) historically accelerates its quota distribution towards the end of each year, perhaps to meet annual targets. 

So far in 2010 only 10 new QFII licences have been approved by the China Securities and Regulatory Commission (CSRC), compared with 24 in 2008 and 19 in 2009. New quotas for the first half of this year were also relatively low at $1.1 billion, against $1.6 billion the previous year. 

“CSRC may be playing its own catch-up game as well since the agency granted four new licences in October, compared to six in the first six months,” notes Guilloux. 

“If our catch-up hypothesis holds true, then we are likely to see a slight uptick of QFII activities in the fourth quarter, pushing 2010’s total closer to $3 billion and reflecting similar volume seen during the past two years.” 

However, Guilloux also cautions against jumping to the conclusion that Safe is shifting into a higher gear since China, much like all emerging economies, has been increasingly worried about hot money inflows potentially inflating asset prices. 

In seeking to determine why a higher quota has been granted to existing players in the past quarter, Z-Ben notes it is the third time that Norges Bank, GE Investment, Barclays Bank and Sumitomo Mitsui Asset Management have received quota top-ups. 

“We suspect Safe is finally following through with its earlier comments about giving more quota to firms that actually put it to full use,” concludes Guilloux. 

In fact, Z-Ben sees a rebalancing in quota issuance to both existing and new applicants as inevitable, given that many of the existing participants have gained more than three years’ experience of investing in China, while the country’s domestic capital markets have been developing steadily, potentially giving QFII participants access to more financial instruments. 

Many firms have also been lobbying the China Banking and Regulatory Commission (CBRC) to open up the interbank bond market, and if the agency is to comply, actual quota usage could increase substantially and suddenly, notes Z-Ben. 

“Recent quantitative easing elsewhere in the world and the resulting worries about hot money inflow would only work to slow Safe’s implementation, not derail it,” suggests Guilloux. 

“When Safe does decide to go ahead, however, QFII participants that have solid execution plans on how to put additional quota effectively and quickly to work could very well jump to the head of the queue.”

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