China smashes previous high for QFII approvals

The CSRC awards licences to 14 long-only institutions including two central banks, two sovereign wealth funds and two pension funds. A rise in quotas is forecast.
China smashes previous high for QFII approvals

China’s securities regulator posted a record monthly high for QFII licence approvals in December, more than doubling the previous best since the scheme was introduced in 2003.

The China Securities Regulatory Commission (CSRC) awarded 14 qualified foreign institutional investor permits in December, it revealed on its website yesterday, trouncing the former peak of six recorded in both September 2004 and August 2008.

The latest beneficiaries are mostly long-only investors and include two Asian central banks (Bank of Thailand and The Bank of Korea), two sovereign wealth funds (Kuwait Investment Authority and Korea Investment Corporation), two North American pension funds (Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan Board) and Taiwan Life Insurance, along with seven investment management companies (see list below).

December’s batch alone nearly doubled the number of QFII licences awarded last year (29), boosting the overall tally to 135 by the end of 2011, according to CSRC’s data.

“As ever, CSRC-preferred firms remain large, stable buy-side institutions with a long-term investment horizon,” reflects Francois Guilloux, director of regional sales for Shanghai-based consultancy Z-Ben Advisors, in a report.

However, he also notes that traditional asset managers were also included, suggesting that this signalled that the gates were, for all intents and purposes, wide open.

While Guilloux does not expect a wholesale revision of the existing quota system, he does forecast that individual awards could increase up to $250 million for this new crop, against a historical average of $100-$200 million.

As of December 21 last year, China’s State Administration of Foreign Exchange had granted a total of $21.6 billion in quotas to 112 QFII licence holders – indicating there are now 23 institutions waiting for quotas.

Overall 14 fresh investment quotas were awarded to licence holders last year, with all but one obtaining $100 million each. The exception was the Hong Kong Monetary Authority, which received $300 million.

Guilloux sees it as no coincidence that QFII awards have picked up following formal implementation of the renminbi QFII programme.

“A volatile equity market has not hurt either, as authorities often seek to expand inflows during periods of tepid market sentiment,” he states, adding that should the CSI300 continue its recent upturn, QFII awards may slow commensurately.

“Having moved into a higher gear, CSRC has clearly shown its intentions of making QFII access easier for the foreseeable future,” Guilloux says. “Close observation of the institution’s moves during the next several months will reveal whether this is a shift in response to market moves or a more permanent realignment of cross-border investment policies.”

The acceleration of QFII approvals is in line with Beijing’s drive to open up its domestic capital markets further. Greater participation by long-term foreign institutions would help to improve the structure of the A-share market, widely acknowledged as highly speculative and volatile.

As part of its moves to internationalise the renminbi, the expansion of the QFII scheme is taking place against the backdrop of capital outflows and moderation in RMB appreciation.

China’s foreign exchange reserves declined for two consecutive months in November ($3.2 trillion) and December ($3.18 trillion) after rising to $3.27 trillion in October from $3.2 trillion the month before.

Towards the end of 2011, the renminbi fell towards the lower limit of its trading band set by the People’s Bank of China (PBoC), suggesting the currency may no longer remain on a one-way appreciation path as it has over the past few years.

The seven investment management firms included in the latest batch of QFII licence approvals are Van Eck Associates, Hansberger Global Investors, Ernest Partners, Northern Trust Global Investments, Russell Investments Ireland, Metzler Asset Management and HI Asset Management.

¬ Haymarket Media Limited. All rights reserved.