The China onshore market is far more accessible and open than global investors claim, according to a prominent fund manager at a conference yesterday.
And with international investors maintaining their caution, a market-watcher has said that a number of hurdles will soon be resolved.
With China A shares last week failing to be included in emerging market indices he claimed that quota and beneficial ownership concerns could be resolved within months.
Ding Chen, Hong Kong-based chief executive of CSOP Asset Management, said that she saw a number of ways to access China which were far more open than just three years ago.
“When we launched the [FTSE China] A50 [exchange-traded fund] in Hong Kong back in 2012, we experienced the lack of [RQFII] quotas - sometimes for half a year we didn’t have quotas,” Ding told the London Stock Exchange Greater China Forum in Hong Kong yesterday.
Ding said investing in China had become far more accessible with the launch of the Shanghai-Hong Kong Stock Connect scheme.
“About the quota application process, some foreign investors do not understand because they don’t have a chance to participate there,” Ding said.
“For Safe [the State Administration of Foreign Exchange], I have to say it uses a very clear and transparent rule-based process in [quota] allocation.”
Ding noted that when an asset manager runs out of quota and files an application for more, every month the Chinese foreign exchange regulator uses a first-come-first-served allocation approach if their region still has quota available.
CSOP is the largest renminbi qualified foreign institutional investor (RQFII) holder with an Rmb46.1 billion ($7.4 billion) quota and a $200 million QFII quota. The firm is using its Stock Connect quotas to replace RQFII quotas for its ETFs.
The issues that Ding mentioned are two of the concerns regularly cited by global investors. Patrick Wong, head of China sales and business development at HSBC Securities Services, said the four key concerns over accessing China were: liquidity, transparency, channels and non-DVP (delivery versus payment) systems.
The QFII scheme does not yet enjoy daily liquidity in capital repatriation, and on transparency, global investors said they find it hard to guess the size of quotas they will be awarded.
“They still see a non-DVP market where they are subject to different counterparty risks,” said Wong. He added that global investors have also been calling for more investment channels and quotas.
Kenneth Kok, executive director of Goldman Sachs’ securities division, said that DVP concerns over the QFII and RQFII schemes were relatively small, and Hong Kong Exchanges and Clearing’s (HKEx) central clearing and settlement system had introduced a DVP function for Stock Connect in April. “That is not ideal but it is functioning,” he said.
Such concerns were also reflected in China A shares’ failure to be included in MSCI’s emerging market indexes last week, because of issues over the quota allocation process, capital mobility restrictions and beneficial ownership.
“I am very optimistic that regulators and policymakers can resolve quota and beneficial ownership concerns within the coming 12 months, and it could be even sooner - within three to six months,” Jonathan Ha, CEO of Red Pulse, a Shanghai-based market intelligence firm, told AsianInvestor last Wednesday (June 10) after MSCI announced its decision. He predicted rapid reforms to new cross-border programmes such as Stock Connect and the expansion of investment quotas.
“Capital mobility is a more complex topic, however, as it is not only tied to financial regulators’ plans for market development, but overall economic and geopolitical considerations as well,” Ha noted.
Asked what their biggest wish would be if officials could solve one key accessibility issue, 30% of the conference audience yesterday said they wanted China to remove the daily and aggregated quota system, while only 1.5% said their priority was the removal of capital repatriation restrictions on the RQFII and QFII schemes.
AsianInvestor is hosting a conference to discuss the opportunities created by Stock Connect on June 29 in Hong Kong. For further details click here