China’s securities regulator has expanded the scope and scale of its RQFII programme to include Hong Kong-domiciled financial firms in a move welcomed as a fantastic opportunity for foreign asset managers and the HK market.

The China Securities Regulatory Commission (CSRC) delivered its long-awaited RQFII 3 announcement late on Wednesday night, removing constraints on asset allocation and giving managers flexibility to design and launch products in line with prevailing market conditions.

The CSRC is allowing more institutions to participate, including the Hong Kong subsidiaries of mainland commercial banks and insurance firms and Hong Kong-domiciled financial institutions. This will expand the investor base and see more foreign currency converted into renminbi.

In doing so it is throwing open its doors to foreign financial institutions for the first time, with both HSBC and Standard Chartered reportedly expressing interest yesterday in obtaining an RQFII licence, as have others such as BOC Asset Management (HK).

The regulator has expanded the range of investment tools an RQFII manager can invest in, to include index futures, listed options and the interbank bond market, while they can also subscribe to convertible bond issues, share placements and initial public offerings.

It’s a step forward from the time the RQFII scheme was launched in December 2011, when regulations stipulated no more than 20% could be invested in equity and no less than 80% in fixed income.

Peter Alexander, managing director of Shanghai-based consultancy Z-Ben Advisors, bills the RQFII scheme as a bigger opportunity for foreign asset managers than the proposed RMB cross-border funds initiative recently announced by Hong Kong’s Securities and Futures Commission.

“RQFII is a platform for developing products to meet the demand of global institutional investors,” he told AsianInvestor on a flying visit to Hong Kong yesterday. “The removal of restrictions allows fund managers to come up with ideas which meet the demand of investors.”

Fund managers have largely greeted the regulatory update enthusiastically as it allows them to develop and deploy more products. “This is fantastic for the Hong Kong market because it’s all for Hong Kong business,” says Stewart Aldcroft, senior adviser at Citi Transaction Services.

Under the new regulations, an RQFII holder cannot hold more than 10% of a single stock, while offshore investors (including RQFII holders) are prohibited from owning more than 30% of a stock.

RQFII applicants need to demonstrate sound financial status, good corporate governance and internal controls, and not have been punished by a regulator within the past three years.

Approval of RQFII licences will now take no more than 60 days, while quota applications to the State Administration of Foreign Exchange will similarly take no more than 60 days, providing all documents are provided. From start to finish the process will take four months.

Aldcroft adds he does not expect RQFII quota to be used exclusively for public funds, with some managers preferring to set up private funds under the scheme. This could provide an opportunity for Chinese sunshine funds seeking licences in Hong Kong.

However, some fund managers prefer to adopt a wait-and-see approach. One senior executive at an RQFII holder in Hong Kong raised concerns over the inherent advantage RQFII has over its onshore cousin, QFII. While the former enjoys daily liquidity, it is only weekly for the latter.

He raises the question about whether this will continue to apply, given that the investment scope of the RQFII scheme is now in line with QFII, and says he will wait for Safe to release its updated guidelines before applying for any potential new quota.

To excited fund managers, he also dampens expectations when it comes to getting up and running, noting that setting up accounts with the People’s Bank of China and the China Securities Depository and Clearing is a time-consuming and complicated business. As such he indicates that foreign competitors might not be able to start their operations in the near term.

Nevertheless, the fact is that Chinese fund houses now face the prospect of greater competition, with a raft of potential new entrants set to enter the marketplace.

The renminbi-denominated foreign institutional investor (RQFII) programme was launched in December 2011 to allow the Hong Kong subsidiaries of mainland fund managers to invest back into the onshore securities market.

An initial quota of Rmb20 billion was permitted, with regulations stipulating that no more than 20% would be invested in equity and no less than 80% in fixed income.

That was then expanded in April last year by Rmb50 billion, with RQFII permit holders allowed to deploy their quotas into exchange-traded funds.

And late last year the chairman of the CSRC, Guo Shuqing, announced plans for a Rmb200 billion expansion of the scheme, in a move billed as RQFII 3.