The Hong Kong arms of Chinese fund houses are having to broaden their offering beyond renminbi products, as the value of their RQFII quotas – which allow direct investment in mainland securities – is being steadily eroded.
This has been underscored by two recent moves by Beijing to further liberalise domestic capital markets – namely the further opening of the interbank bond (IBB) market and the overhaul of the renminbi qualified foreign institutional investor (RQFII) quota system.
“Chinese offshore fund managers will need to showcase their investment capability and proven track record as asset managers in a bid for foreign assets, rather than being merely an access or product provider,” said Jelle Vervoorn, chief executive at HFT Investment Management (HK). HFT HK is the overseas arm of the joint venture between BNP Paribas Investment Partners and Haitong Securities.
Offshore Chinese fund managers have been the biggest beneficiaries of the RQFII scheme since it launched in late 2011. They were the first group of licence- and quota-holders to be able to offer RMB products, mainly fixed income strategies, to foreign investors. They hold Rmb143 billion ($21.8 billion) in quota (30% of the total Rmb471 billion) according to the State Administration of Foreign Exchange (Safe).
However, Beijing’s move last week to further open up the world’s third largest bond market means foreign medium- to long-term investors – excluding hedge funds – can now buy onshore bonds without quota controls via a simplified registration approach. (That said, foreign investors want to see certain issues clarified before they commit capital.)
“Given the ease of approval and flexibility of the programme, the QFII and RQFII programmes could appear obsolete,” said Becky Liu, senior rate strategist for global research at Standard Chartered, in a report.
But “it does not mean RQFII will become obsolete, foreign investors still need the programme to access to onshore exchange bond and equity capital market,” noted Gregory Suen, Asian fixed-income investment director at HSBC Global Asset Management in Hong Kong.
Still, the move will allow more control over the timing of investments, “because it’s hard to estimate when RQFII approval will come and also the size of the quota granted”, said Suen. HSBC Global AM (Hong Kong) holds Rmb800 million in RQFII quota and $327 million in QFII quota.
Moreover, foreign investor participation should improve credit risk pricing in China, he added. “The onshore credit yield curve is quite flat, meaning small-sized and low-credit-quality issuers do not provide a significant credit risk premium.”
Mainland credit research will be an area where foreign investors need assistance, as the onshore rating system is significantly different from the international standard, said HFT’s Vervoorn.
The firm will now focus on advisory services in this area. “The domestic Chinese bond market is a different animal [from its international counterparts],” Vervoorn said. “Foreign investors are now allowed access, but not all of them have an in-depth understanding of the asset class and are able to navigate the complex market in China.”
Meanwhile, Safe’s move in early February to give existing QFII managers a quota based on a percentage of their AUM, replacing the previous application system, will also provide easier direct access to Chinese equities.
Chinese fund managers have been aware of these challenges to their RQFII businesses for some time, given the widespread expectation that quotas will not be needed to access mainland securities within a few years, as reported.