Blockbuster RQFII expansion tipped for Hong Kong

The city has hit its RQFII quota capacity limit. The regulator is expected to expand this after the launch of Stock Connect, although concerns remain over the utilisation rate.
Blockbuster RQFII expansion tipped for Hong Kong

Authorities are being tipped to introduce a blockbuster expansion of the RQFII scheme in Hong Kong after hitting the quota cap, although concerns remain that only half the quota has been allocated so far.

However Ivan Shi, a senior manager at Shanghai-based consultancy Z-Ben Advisors, noted that any quota expansion was only likely to be brought in after the launch of the Shanghai-Hong Kong Stock Connect programme, which is expected this month.

China’s State Administration of Foreign Exchange (Safe) handed out Rmb4.7 billion ($766 million) in renminbi-denominated qualified foreign institutional investor (RQFII) quota to 12 firms this September, taking total approved quota to Rmb283.3 billion.

Hong Kong has been granted a total RQFII quota allocation of Rmb270 billion since the scheme was first introduced back in 2011.

“They [the respective stock exchanges and regulators] have to ensure a good start for Stock Connect first,” said Shi. “The implementation of other policies will be delayed until after that.”

Guo Song, head of Safe’s capital accounts department, was cited by Xinhua news agency last week as saying the FX regulator was working with other departments to expand RQFII quota for Hong Kong, given that outstanding capacity was limited.

However, questions remain about quite how imminent an RQFII quota expansion for Hong Kong is, with a spokesperson for the Shanghai stock exchange noting that nearly half of the city’s approved RQFII quota remained unused.

The thinking is that Chinese authorities would like to see more of the existing renminbi pool in Hong Kong used up on Stock Connect before approving an increase in allocation.

However, Z-Ben pointed out that Stock Connect would not necessarily be a quick solution for exchange-traded fund managers to use up quota due to volume caps, uncertainty over quota availability and pre-trade clearing issues in the Stock Connect programme (exchange rules state that investors need the capital/equity in their account for the trade they want to make).

In other words, A-share ETF managers such as CSOP will require additional RQFII quota after the launch of Stock Connect. “RQFII quota supply in Hong Kong is tight now,” said Shih. “We won’t have to wait a long time for expansion.”

Certainly, it’s a fair observation that concern over the quota utilisation rate does not appear to have slowed down the approvals process.

This August, the China Securities Regulatory Commission (CSRC) granted RQFII licences to a further eight institutions in Hong Kong, London and Singapore.

Among them, AllianceBernstein (HK), Gottex Penjing Asset Management (HK) and Guotai Junan Fund Management (HK) have each received their first quotas.

Meanwhile Yuanta Securities (HK), Caitong International Asset Management (HK), Aberdeen Asset Management Asia (Singapore), BNP Paribas Investment Partners (Paris) and Investec Asset Management (UK) are all awaiting their quotas.

Existing RQFII licence holders appear confident that further quota will be approved in the next two months.

Allen Wang, managing director at Yuanta Securities (HK), a subsidy of Taiwan’s largest securities house, told AsianInvestor that its Hong Kong arm had applied for Rmb1 billion. It is hopeful at least half of that will be granted in the next two months.

The firm says it is planning to invest in onshore fixed income but has no intention of launching new products initially.

Aberdeen AM applied for Rmb600 million and says it is expecting the final sum to be confirmed by Safe next month. Its Singapore office is planning an A-share fund, marketed to European investors at first.

A-shares manufacturers including CSOP, China Asset Management (HK) and E Fund Management (HK) have received the largest allocation to date among the Hong Kong firms that have been awarded quotas.

CSOP is the largest aggregate RQFII holder with Rmb46.1 billion at the end of September, 98% of which has been used in its public funds as at September 10.

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