US fund house AllianceBernstein plans to hand back the QFII and RQFII quota it uses for buying bonds, an explicit indication that the two cross-border investment schemes are becoming obsolete, particularly for fixed income managers.
Hayden Briscoe, the firm's director of Asia-Pacific fixed income, said he preferred the greater freedom to buy mainland bond assets provided by last month's opening of the Chinese interbank bond (IBB).
“I have RQFII and QFII quotas, but I am going to hand it back,” said Briscoe on the sidelines of FinanceAsia's Borrowers and Investors Forum in Hong Kong last week. Other investors may still use quota for equities, he added, implying that bond allocators are now less likely to rely on this channel.
Since February 27 foreign institutions, including asset managers except hedge funds, have been able to access the mainland IBB market without a quota under the qualified foreign institutional investor (QFII) or its renminbi version, RQFII. The IBB market accounts for 93% of the world's third largest bond market
Foreign bond investors will still need QFII and RQFII quotas to acces the onshore exchanged-traded bond market, which is much less liquid and smaller (accounting for 4% of mainland bonds, with the remaining 3% traded over-the counter). Equity investors will also still need quota to buy A-shares.
AllianceBernstein holds $150 million in QFII quota via the UK office and Rmb500 million ($76 million) in RQFII allowance via Hong Kong office, and most RQFII quota is used for onshore renminbi bonds.
AsianInvestor understood that foreign investors were told the registration process will take about 20 working days, but are waiting for more details on the new mechanism. For instance, China’s State Administration of Foreign Exchange (Safe) has not yet addressed questions around capital remittance, capital gains tax and how to convert money from offshore into onshore renminbi.
The RQFII programme is expected to be hit harder than the QFII scheme, because it is thought that more overall RQFII quota is used for fixed income assets than for equities. Safe has not disclosed the asset allocation under RQFII, but said only about 10% of QFII investments were in bonds and 70% in equities as of end-2014, the latest data available.
Despite the strong interest in the IBB market, market participants do not expect huge inflows in the short term due to concerns over onshore credit qualities and immature rating system, among other issues.
Briscoe said AllianceBernstein would not be rushing to invest in mainland bonds, as it wanted to assess how the transition from CNH to CNY would be handled. He added that the market would like to see a standardised index for Chinese bonds, as “that would speed up the development process”.
Still, he was upbeat about the onshore bond market’s attractiveness amid low yields globally and said flows from foreign sovereign funds and central banks would bring changes and growth in the market. He expected it to surpass Japan’s bond market as the world second largest and that China’s credit market would be larger than that of the US in four years.
Insurers and pension funds are set to be major players, noted Briscoe, as renminbi bonds can provide positive real yields higher than those elsewhere. “Look at Swiss [insurers] moving out of the country to get income; and big pensions are moving into emerging markets to get income,” he noted.
Yield to maturity of the Citi World Government Bond Index was 0.93% as of January 31 (when the index's effective duration was 7.59 years), while the 10-year China onshore government bond yielded 2.9% as of March 3.