London to get Rmb80bn RQFII quota, but doubts remain

Beijing pledges offshore RQFII quota for London, but the city's shallow RMB pool coupled with its trade deficit with China could hinder its prospects of becoming a thriving offshore hub.
London to get Rmb80bn RQFII quota, but doubts remain

China regulators are to make Rmb80 billion ($13.1 billion) in renminbi qualified foreign institutional (RQFII) quota available to financial institutions in London, it emerged yesterday. No timeline was given.

It comes just three months after the China Securities Regulatory Commission (CSRC) announced plans to expand its RQFII programme to institutions in both London and Singapore.

UK chancellor George Osborne, visiting Beijing for the fifth Sino-British economic and financial dialogue yesterday, told local media that the two governments had agreed on the Rmb80 billion quota.

The State Administration of Foreign Exchange (Safe), which grants quota to RQFII holders, did not respond to AsianInvestor's requests seeking comment.

July’s announcement to extend the RQFII programme to London and Singapore followed news that China had in June signed a memorandum of understanding (MoU) to extend its RQFII programme to Taiwan.

RQFII holders can invest directly in China’s equity and fixed income markets using offshore renminbi. It’s a popular programme among international investors in Hong Kong – notable foreign RQFII holders include HSBC and Pinebridge Investments.

Institutions looking to participate in the RQFII programme must comply with regulations already in place for Hong Kong institutions, CSRC has noted.

Yet some analysts remain doubtful about how successful London will be in terms of developing as an RQFII hub, given that the city’s pool of offshore RMB remains shallow.

London’s offshore RMB market is estimated to total Rmb100 billion at the end of 2012, meaning the Rmb80 billion quota will represent 80% of the city’s existing pool.

“The offshore RMB pool in London is still very shallow now, and most of this money comes from trade financing,” Chi Lo, Great China senior strategist at BNP Paribas, tells AsianInvestor. This means the money isn't sticky.

In addition to having a shallow pool, Lo argues that the UK’s trade deficit with China – which he puts at an average of $27 billion a year since 2008 – will make it difficult for London to accumulate any meaningful sums of RMB and could even hinder investment.

It’s a different story for Hong Kong and Taiwan, both of which have trade surpluses with China. Hong Kong, with Rmb698.5 billion ($113.8 billion) in RMB assets, is the largest offshore market.

Yet other players, notably HSBC, remain bullish on the recent news.

"The approval of substantial RQFII quota for London-based investors is an important step forward in London's development as a European RMB hub, as London-based fund managers will be drawing on their experience to manufacture RQFII products and their distribution networks to allow European investors to access the onshore market in China,” says Justin Chan, HSBC co-head of markets, Asia-Pacific.

Separately, on Monday it was announced that CSRC had handed out two RQFII licences and three qualified foreign institutional investor (QFII) licences. PineBridge Investments, which managed $68 billion in AUM as at June 30, received an RQFII licence last month, as did Chong Hing Bank.

Recipients of QFII licences in September were Guosen Securities (HK) Management, the Mayo Clinic and GF International Investment Management.

The award of just two RQFII and three QFII licences represents something of a slowdown. CSRC granted five RQFII and five QFII licences in August, and six RQFII and three QFII licences in July.

But this is nothing sinister, says Cindy Qu, senior analyst in Shanghai-based Z-Ben Advisors, given that China has just finished a 10-day holiday.

She adds that most of the largest financial institutions in Hong Kong have already obtained QFII licences, and now the regulator is looking to diversify.

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