Aussie RQFII demand low, hangs on MSCI move

Commodities trading means Australian investors already feel exposed to China, notes State Street Global Advisors. But China's inclusion in MSCI's EM index would force investors to act.
Aussie RQFII demand low, hangs on MSCI move

Demand for renminbi-denominated securities is expected to be lacklustre in Australia, at least initially, despite Sydney being touted as next in line to be awarded RQFII quota by Beijing.

Mark Wills, head of the investment solutions group for Asia Pacific ex-Japan at State Street Global Advisors, noted that Australia was "at the higher end of countries that have offshore investments, and by definition have a higher allocation to emerging market equities”.

Due to the developed relationship between Australia and China centred around commodities trading, investors may already feel they have plenty of exposure to China through the asset class, Wills explained.

He noted that China’s A-share index is heavily tilted to financial and industry/resources stocks. As such, buying Australian resources stocks is one way to access China’s growth story indirectly.

In addition, the Australian universe is also tilted towards industry and banks. “It is fair to say that Australia itself would have pretty large overlaps in terms of exposure to both indexes,” said Wills.

But Anthony Fasso, international CEO of $136 billion AMP Capital Investors, pointed out that demand for RMB-denominated securities would increase once index provider MSCI included China in its benchmark emerging markets index, which Fasso is forecasting will happen next year.

MSCI is due to review the country’s inclusion in May. In June last year, it included China on its list for consideration in its EM index, with a proposed initial inclusion of a 5% weighting.

“Funds, wherever they are located, will have to start to make an active decision to include or exclude China,” Fasso told AsianInvestor.

Many global pension funds have very small direct exposure to China, suggesting demand would increase significantly if MSCI included China in its EM index, Fasso said.

Deutsche Bank has estimated that a 5% weighting in the EM index would attract inflows of more than $7 billion to the A-share market.

Investors have three main routes to increase their China exposure: the Qualified Foreign Institutional Investor (QFII) and Renminbi-denominated Qualified Foreign Institutional Investor (RQFII) schemes and the imminent Hong Kong-Shanghai Stock Connect programme.

AMP already has three QFII funds, although Fasso admitted that demand had not been strong. Asked if AMP would apply for an RQFII licence, Fasso said he was monitoring the market.

Research firm Cerulli Associates has predicted that RQFII will continue to gain traction globally as demand for China exposure grows.

It observed that while international institutions are underweight China, they are looking to increase exposure, with RQFII exchange-traded funds seen a relatively safe way of doing so.

The assets under management of ETFs listed in Hong Kong increased by 16% in July alone driven by RQFII inflow, Cerulli noted.

However, managers are concerned that shine could wear off when Stock Connect goes live, which is expected to be this month, as it would provide another way to access China’s equity market.

“While the waters on the passive RQFII ETF route have been tested and appear to be navigable ahead of the potential threat posed by Shanghai-Kong Hong Stock Connect, there are signs that more managers could be looking to launch active RQFII funds,” Cerulli noted in a report.

Last month London-based Ashmore joined the ranks of fund houses distributing RQFII funds outside of Hong Kong with the launch of a trio of actively managed China Sicav funds.

"With China being the second largest economy in the world, we anticipate that over time most institutions and retail investors will have to have some dedicated exposure to China,” said Christoph Hofmann, Ashmore’s global head of distribution based in London.

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