Hong Kong-based Chinese fund houses with RQFII quotas need to develop into well-rounded asset managers in order to stay competitive in the market, a forum heard.
Despite enjoying the benefits of being first to use the investment licences when they were launched in late 2011, the fund managers were warned that global expansion of the scheme, along with new investment channels, put that advantage at risk.
When quotas for the renminbi qualified institutional investor scheme become a thing of the past, managers were told they need to have transformed themselves into stand-alone asset houses.
David Zhang, CIO and deputy CEO at E Fund Management (Hong Kong), said he believed the RQFII and QFII schemes would move from giving access to quota-funded products to offering actual investment skills to clients.
“Going forward, it is not just about products, but Chinese RQFII managers have to move fast to be true asset managers rather than a products provider; maybe in years [to come] there will be no quota at all,” Zhang told the FundForum Asia in Hong Kong on Monday.
E Fund (HK), a subsidiary of Guangzhou-based E Fund Management, is the second-largest holder of RQFII quota, with Rmb27.2 billion ($4.4 billion) as of the end of March.
Fund houses like E Fund with Chinese parent companies were among the first group of managers to benefit from the RQFII scheme. However, these managers have been losing their advantage as RQFII holders ever since the cross-border programme was rolled-out to cities around the world over the past two years.
To make things more difficult, Hong Kong has used up its Rmb270 billion in RQFII quota, meaning managers in the city have been unable to receive fresh quota until the State Administration of Foreign Exchange expands the allocation.
Zhang said that some firms he has been working with over the past two years are now able to apply for RQFII quota by themselves, which a few have been taking advantage of. He pointed out that while Hong Kong is the regional RQFII centre, clients based in major cities around the world now had direct access to China through their countries’ own quota.
Jelle Vervoorn, managing director at HFT Investment Management (HK), agreed that while more competition was on its way, it would be a beneficial development.
“As asset managers we have played the access card in the past few years, and that card has become less valid every day,” Vervoorn said. “You have to go back to your core as an asset manager - what are your capabilities in managing portfolios and can you tap into the distribution? These two elements set you apart from the competition.”
As Hong Kong had used up its RQFII quotas, Zhang said managers were trying to use the cross-border trading link Stock Connect as a solution.
“We are looking for other ways, such as working with other managers who have quota but zero teams investing in China equities and bonds. The other way is to use the Stock Connect replacing RQFII quotas we have,” Zhang said.
E Fund is not the only manager using the Shanghai-Hong Kong Stock Connect, with other Chinese fund houses like CSOP Asset Management also using the trading link as a solution for its RQFII shortage.
Zhang said another development was tapping the Chinese who wanted to invest outside of China, which could be a significant source of funds in the future. As a result, Chinese managers would have to diversify their business to capture both global capital flowing into the country and domestic money flowing out.
Delivering his speech on the panel titled “QFII and Stock Connect”, Zhang also saw potential in the cross-border trading scheme expanding to Shenzhen, offering short-selling opportunities to foreign investors.
Zhang said: “Most small-cap companies have been pushed to a high valuation by onshore investors, but it is hard to borrow and short in China; when they are available to short in Hong Kong, that will be something we would love to see.”
Hong Kong media has reported that the Shenzhen-Hong Kong Stock Connect will be launched in October. Media reports have also stated that the Shanghai and Shenzhen links will both increase their daily southbound and northbound quota limits while they will scrap their overall quota limits.
The Shenzhen Stock Exchange has also said the upcoming scheme is likely to include equities from the high-growth ChiNext board, the average price to earnings ratio for which reached 95.5 times yesterday.
Zhang said Shenzhen Stock Connect would help when index provider MSCI decided whether to include A shares into its global emerging market index. He said that global investors will find it difficult to argue that A shares were not accessible after both markets were part of Stock Connect.
“Going forward, lots of our products may not use RQFII at all, given the accessibility of Stock Connect,” Zhang added.