Proposed deregulation to China’s funds industry and QFII scheme has been lauded as a positive move to long-term investment by authorities and evidence of a willingness to reform despite volatile markets.
This week the China Securities Regulatory Commission (CSRC) announced two sets of measures designed to create a more conducive environment for both domestic fund managers and foreign financial institutions to conduct business.
Under the proposals, the regulator will no longer need to check suitability of minority shareholders for a holding of less than 5% in a fund management firm, clearing a path for more private capital to enter the industry. The idea is to diversify the shareholdings of FMCs, which are largely domestic financial institutions and state-owned enterprises at present.
Further, the CSRC aims to extend the eligibility requirements for foreign shareholders beyond those with experience in managing mutual funds; management of pension funds, charity funds and endowments will also be allowed. This is designed to broaden expertise available to FMCs.
Importantly, the regulator is also going to abolish the 49% shareholding limit in FMCs. To encourage the major shareholder to continue providing support, rules on related-party shareholding will be abolished and the lock-up period will be prolonged from one to three years.
Fund management firms will also be allowed to set up specialised subsidiaries and outsource some business lines so they can develop differentiated competitive advantages, therein creating a more robust and sustainable industry.
And the CSRC also released pilot measures allowing the segregated accounts of FMCs to invest in equity, debt and rights to earnings of unlisted companies.
It plans to abolish caps on segregated-account holdings in a single stock (20% of AUM) and single security (10%), as well as a limit on the number of investors committing a single amount above Rmb3 million and a cap of 200 investors in a segregated account.
A source from Tian Hong FMC suggests “the deregulation will inspire the industry to seek a break-through in business lines and operating models; and the relaxation of investment scope will cultivate the soil for wealth management institutions to develop distinctive expertise in a wide array of specialised areas”.
Separately, on proposed changes to qualified foreign institutional investor (QFII) rules, the CSRC plans to lower the entry barrier by slashing the minimum requirement on a firm's AUM to $500 million, from $5 billion, and on operational experience to two years, from five.
QFIIs will be granted greater flexibility in investments as well: not only they will be allowed to invest in the interbank bond market, but their maximum aggregate holding of any domestic stock will be raised to 30%, from 20%.
Charles Feng, head of Northeast Asia for foreign exchange, rates and credit at Standard Chartered, sees the opening up of China's interbank bond market as a breakthrough that creates a huge opportunity for foreign investors.
“With over $3 trillion of outstanding amount, China’s interbank bond market is among the five largest bond markets in the world,” notes Feng. “The exchange bond market where QFIIs have been investing is less than 1% of China's entire bond market.”
The renminbi has also now entered a phase of movement up and down instead of simply one-way appreciation, encouraging foreign institutions to invest in equities rather than bonds.
“In the past, the regulator was concerned that foreign investors were just betting on RMB appreciation without taking any risk," Feng explains. "But now investing in bonds does incur interest-rate risk and credit risk without one-way FX appreciation gain, and this makes bond investment more acceptable to the [Chinese] regulators.”
Evan Goldstein, head of product management for the East within transaction banking at Standard Chartered, says: “When the markets are turbulent and uncertain, China’s willingness to commit to reform and open up will allow long-term foreign investors to increase direct ownership of domestic companies. This sends strong positive signals to potential investors.”
To quicken the approvals process, QFII applications can be submitted in electronic format and the requirements for documentation will be simplified.
Since the introduction of the QFII scheme in 2002, the regulator has awarded a total of 172 licences to foreign investors, of which 145 have been granted investment quotas so far totalling $27.26 billion. Total assets under QFII accounts stand at Rmb271.3 billion, which amounts to just 1.1% of the free-float market cap of A-shares.
The CSRC confirms also that it is coordinating with other governing bodies to raise the investment quota upper limit from $1 billion and simplify the process of opening accounts to attract more long-term funds from abroad.