Beijing has scrapped asset allocation limits for the qualified foreign institutional investor (QFII) scheme and its renminbi equivalent (RQFII) to provide further flexibility and attract more foreign capital under the two cross-border schemes.
“The move aims to facilitate investment and lure more long-term flows," said Deng Ke, a spokesman for the China Securities Regulatory Commission at a briefing on Friday.
QFII licence-holders in the past had to put at least 50% of their total investments made under the scheme into equities, and both QFII and RQFII investors could only have a maximum 20% of their allocation in cash.
The QFII scheme allows foreign institutional investors that meet certain criteria to directly buy onshore Chinese securities, while RQFII allows them to do the same using renminbi raised in Hong Kong.
The scrapping of allocation limits change came just ahead of the renminbi being officially included in the International Monetary Fund’s special drawing rights basket on Saturday (October 1).
Yet even as QFII and RQFII become more flexible, they are also declining in importance, and it is only a matter of time before they become obsolete in light of the growing number of other channels opening for inbound investment. Bond and ETF trading links with Hong Kong are set to follow the Shanghai and Shenzhen Stock Connects, and the China interbank bond market (CIBM) is becoming more accessible.
Indeed, Hayden Briscoe, then director of fixed income at AllianceBernstein, said in March the US fund house would hand back the RQFII quota it used to buy Chinese bonds, in favour of using the CIBM programme. Briscoe has since joined UBS Asset Management.
However, QFII is still a highly restricted scheme. US-based index provider MSCI said its cap on monthly capital repatriation – set at 20% of a holder’s total assets invested onshore at the end of the previous year – was a major constraint for foreign investors, and one of the key reasons why it has not included China A-shares in its emerging-market indices.
The latest move to liberalise the QFII and RQFII programmes comes after the State Administration of Foreign Exchange, the mainland currency regulator, overhauled the QFII scheme in February by introducing a registration and quota allocation approach. It then did the same for the RQFII scheme last month.