China's foreign exchange regulator has taken a big step towards harmonising its two primary foreign investor schemes, introducing flexibility in quotas that will likely drive overseas firms to raise their onshore allocations.
Late on Monday (December 7) the State Administration of Foreign Exchange (Safe) announced that qualified foreign institutional investors (QFIIs) would be allowed to share previously alloated RMB quota across existing open-ended mutual funds and to re-allocate quotas (for example, where fund A is unsuccessful and fund B is successful and requires more quota), subject to approval.
Further, QFII licensees who want to postpone their initial remittance of principal after winning quotas can seek approval from Safe within 10 working days of the deadline and receive a six-month window, once approved.
Under the old rules, if a QFII investor failed to remit funds within six months after a quota had been granted, it was not allowed to except with express permission from Safe, with its quotas being reduced to the actual amount remitted.
Effie Vasilopoulos, Hong Kong-based partner at Sidley Austin, noted a similar condition was applied to RQFII investors in 2014, but the official ruling on this had yet to be made publically available.
These new rule changes, which became effective immediately, can be seen as a further step towards harmonisation of the QFII programme with its renminbi equivalent, RQFII. (Such flexibility is already applied under the RQFII scheme).
Nicholas Britz, an associate at Shanghai-based Z-Ben Advisers, believes that both the QFII and RQFII programmes will be harmonised in coming years, with functionally equivalent access terms.
Vasilopoulos noted that the changes were designed to provide greater flexibility to QFII investors, while new filing requirements aimed to track QFII products in a more systematic manner. As such, if investors want to reallocate quota in future, a system will be in place for authorities to allow them to do that.
Foreign licensed quota holders – including fund groups, insurers, brokers, investment banks and others such as sovereigns and pension funds – will now be required to file details on their QFII quota usage in two categories: open-ended mutual funds, and others.
They will need to file details of all their QFII products within the next month and to register with Safe through their custodian banks.
This new flexibility is expected to drive foreign investors to increase their investments into China via QFII, particularly given that only half of the $79 billion in total quotas issued has been utilised so far, according to Shanghai-based research house Red Pulse.
Both Safe and CSRC have attempted to reform QFII and RQFII in an effort to liberalise China’s capital markets. For example, Safe lifted the $1 billion QFII quota cap in March this year to boost capital inflows.
Launched in 2002, the QFII scheme is the oldest cross-border investment channel for foreign investors in accessing China's domestic capital market.
A total of 277 licenses had received $79 billion in quotas by the end of November. This is comprised of 158 asset managers ($36 billion), 42 central banks and commercial banks ($17.6 billion), 18 insurance companies ($6 billion), 14 brokerage firms and investment banks ($4.1 billion), and a total 45 sovereign funds, endowments, family offices and pension funds ($15.3 billion).
In terms of registration, Hong Kong (56 licensees with $17 billion in quotas), Taiwan (32 licensees holding $9.7 billion), the US (46 licensees with $8.6 billion), the UK (25 licensees for $6.9 billion ) and Singapore (22 licensees holding $6.9 billion) are the top five countries under this scheme.
To view these latest documents from Safe in simplified Chinese, please click here.