Managers face hurdles as RQFII scheme expands

RQFII fund managers face increasing pressure from the pending Stock Connect scheme and narrowing onshore/offshore bond spreads, which could reduce the appeal of debt products.
Managers face hurdles as RQFII scheme expands

While momentum is continuing for China’s RQFII scheme with the recent inclusion of Germany and the issuance of more licences, some feel the looming Stock Connect link and narrowing offshore/onshore bond yield spreads may reduce the scheme’s attractiveness.

The Shanghai-Hong Kong Stock Connect scheme could tempt investors away from renminbi qualified foreign institutional investor (RQFII) funds, argued Ernest Yeung, managing director at the Hong Kong arm of Changsheng Fund Management.

Changsheng obtained a renminbi qualified foreign institutional investor (RQFII) licence last month, but Yeung said he would wait to gauge the market’s response to Stock Connect before launching new product, because it would enable investors to directly access Chinese equities. In any case, he said: “It is getting more difficult for us to launch products.”

The planned programme would provide institutional investors with an alternative channel to access Shanghai’s stock market, and the scheme could be extended to the Shenzhen Stock Exchange. If that happens, RQFII fund managers in Hong Kong could see competition increase further.

But Stock Connect may not be suitable for some institutional investors due to its daily trading quota, said Patrick Wong, head of China sales and business development at HSBC Securities Services. “The daily quota cap would be shared across the whole market, and investors risk not being able to trade as there would be others in the queue.”

As Stock Connect could increase competition for managers of equity funds, managers have turned to fixed income products. But such products may become less attractive because the yield spread between onshore and offshore fixed income has been narrowing since the start of the year. As of June, the spread on five-year GCB had tightened to 86 basis points from just over 100 basis points a month previously, according to HSBC.

HSBC expects the process to continue as onshore yields decline on domestic liquidity, and investors turn to high-grade debt in anticipation of headwinds for high-yield bonds.

Still, HSBC’s Wong said: “European investors are interested in onshore Chinese debt as bond yields there are still attractive.”

Meanwhile, the China Securities Regulatory Commission last month awarded six RQFII and two QFII licences. Among them, HSBC Global Asset Management obtained its second RQFII licence, this time in London, after its Hong Kong unit had become the first foreign fund house to get one in July last year.

Moreover, the RQFII programme was earlier this week extended to Germany, which received an initial quota of Rmb80 billion. Frankfurt has become the third city in Europe to be able to access China’s domestic securities market using offshore RMB. Paris and London were admitted to the scheme with quotas of Rmb80 billion each in June this year and October last year, respectively.

HSBC’s Wong said the inclusion of Germany would see RQFII business increase as many European fund managers are interested in launching Ucits structured RQFII products after Luxembourg permitted the launch of Ucits funds invested entirely in China’s interbank bond market.

In addition to HSBC Global AM, US fund house BlackRock received a second RQFII licence – in the UK – last month. Other RQFII licence recipients were the Hong Kong units of Phillip Capital Management and Samsung Asset Management and Hong Kong-based Qilu International Holdings.

Meanwhile, the CSRC in June awarded the first QFII licences in two months, to Citigroup First Investment Management and Taishin International Bank.

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