Chinese vice-premier Li Keqiang endorsed the long-awaited mini-QFII scheme during his visit to Hong Kong yesterday in the clearest sign yet it is set for imminent approval.
He said an initial quota of Rmb20 billion ($3.1 billion) would be shared among Hong Kong subsidiaries of Chinese securities companies and fund houses to allow them to invest directly into the mainland's securities market.
Although Li did not specify when the scheme would be launched, he offered assurances that Beijing would support the development of offshore renminbi financial products in Hong Kong and would expand renminbi circulation channels between Hong Kong and the mainland.
“Issuing RMB treasury bonds in Hong Kong will be a long-term institutional arrangement of the central government,” he explained. “We will gradually increase the size of issuance and work for the development and improvement of the RMB bond market in Hong Kong.”
Li was leading an official delegation whose main focus was to announce measures aimed at further developing the offshore RMB market and boosting trade and finance links between Hong Kong and the mainland. He is widely expected to succeed Wen Jiabao as premier in 2013.
RBC notes that the quota was relatively small, indicating Beijing remains cautious about opening its domestic financial markets. But the firm's Brian Jackson adds: "This nevertheless represents an important way in which CNY accumulated offshore can move back into the mainland.
"In addition, officials also announced that they would make it easier for Hong Kong firms to use CNY to make direct investments in the mainland, perhaps suggesting that firms' CNH issuers will find it easier to remit funds back to the mainland to support their operations there."
Importantly, Li also announced that Chinese investors would be able to buy into a mainland-listed ETF linked to Hong Kong stocks in a move welcomed by ETF issuers.
“It will act as a catalyst to help shape and drive future product development and innovation for the benefit of clients in the ETF sector over the coming years,” says Nick Good, head of iShares Asia-Pacific, describing it as an exciting development for Chinese investors.
Meanwhile, Chinese asset management companies expressed delight at Li’s mini-QFII statement, which sent stocks on a rally: First Shanghai and Shenyin Wanguo surged 22.2% and 21.3%, respectively, while Guotai Junan rose 9.9%.
Renault Kam, director at GF Asset Management Hong Kong, saw the vice-premier’s speech as confirmation that the scheme will start very soon. “This points to the future business development of Chinese asset managers,” he says.
Pieter Oyens, regional head of business development at Harvest Global Investments (HGI), expresses confidence that the firm will be in the first batch among Chinese fund managers to be granted a mini-QFII licence.
He says HGI has completed all the steps of applying for the quota to the China Securities Regulatory Commission (CSRC) and for an authorised fund to the Securities and Futures Commission (SFC). “Once the quota is received, we can launch the fund very quickly,” he added.
HGI has also set up an investment team and sufficient trading infrastructure and technical systems, Oyens notes. “For the mini-QFII scheme, HGI together with its parent in Beijing has formed an investment team of nine fund managers and three analysts dedicated to the Chinese fixed income market that already manages around Rmb50 billion.”
Other Chinese asset management firms declined to disclose details of their mini-QFII applications as they await the release of final guidelines.
Kam notes that two issues need to be clarified. First, does the distributable fund have to be a mutual fund or can a private fund also get access to the onshore market? Second, should the investment vehicle be a pure fixed income fund or a hybrid fund investing in both onshore equity and bond securities?
“We have already got several plans ready and will decide on one as soon as detailed guidelines are announced,” he says.
GFAM already runs a private fund investing in offshore RMB bonds for professional investors. If the guidelines rule that private funds are not eligible for the mini-QFII scheme, GFAM will need to apply to the SFC to launch a mutual fund to get access to the onshore RMB market.
Wang Jin, managing director at CSOP Asset Management, says: “We are waiting for the detailed guidelines and will launch new fund product accordingly.”
The company, a joint-venture between China Southern Fund Management and Oriental Patron Financial Investments, has also a RMB fixed income private fund under management.
The attraction of investing in China’s onshore RMB market is clear as the yield of onshore RMB bonds of similar duration and credit quality is significantly higher than in the offshore market.
Onshore RMB bonds are traded both on the Shanghai Stock Exchange and via the much larger interbank market. “These two markets are quite different,” notes Kam. “Presently we don’t know which will be permissible under the mini-QFII scheme, so it is hard to define the exact extra yield we could get.”