Note to investors: QFII window open wider than ever

There's never been a better time for foreign investors to apply to access China’s domestic securities markets, with QFII licences and quotas being issued far faster and in larger size.
Note to investors: QFII window open wider than ever

International investors eager to gain access to China’s domestic securities markets are being urged to take advantage of an unprecedented window of opportunity for applications.

Late last week the State Administration of Foreign Exchange (Safe) awarded no fewer than 11 investment quotas to qualified foreign institutional investors, in the clearest signal yet that Chinese authorities are accelerating their cross-border transactions programme.

Shanghai-based consultancy Z-Ben Advisors notes that on average between $3 billion and $3.5 billion has been issued annually in QFII quotas over the past few years to 10-15 licence holders.

Yet already this year, before the end of the first quarter, some $2.81 billion has been split among 22 QFII licence holders (see Z-Ben table). It brings to $23 billion the total sum awarded in the QFII programme overall, compared with about $77 billion for QDII, notes Z-Ben.

And the consultancy is confident that not only will Chinese authorities surpass $4 billion in QFII quota awards this year, but that Safe is keen to more than double total allocations to $60 billion.

“When China signed up to the World Trade Organisation it pledged that it would award $30 billion in QFII quotas by 2013,” says Francois Guilloux, regional sales director for Z-Ben.

“It is easily going to do that, and we believe from discussions we are hearing in Beijing that they might bring this up to $60 billion. While the time frame is uncertain, it is encouraging to see they wish to move forward with the QFII investment programme, which was not necessarily a given.”

Z-Ben sees correlation between negative performance on the local stock market and expansion of the QFII scheme, noting that even though there has been a rebound this year (the Shanghai Composite is up 10% in 2012), the market is well behind where it might have expected to be.

“Over the long term the stock market is far behind where it needs to be in order to bring retail savings from bank deposits into the mutual funds and investment platforms,” reflects Guilloux.

But Z-Ben notes that the Shanghai municipal government is planning to broaden the scope of QFII investment in the city's securities market and is considering opening its futures, derivatives and gold markets to QFIIs.

And Guilloux points to the expansion of QFII and RQFII schemes as evidence that China is intent on accelerating its cross-border investment to hasten the internationalisation of its currency.

“Clearly the foreign investor community can expect more opportunities in cross-border transactions in 2012 and beyond, so for anyone thinking about getting QFII for their international portfolios and clients, now is an interesting time to be approaching regulators on the subject,” he says.

The latest batch of quotas offers evidence not only of the fact that the approvals process is speeding up, but also that authorities are willing to award increasingly large sums.

While last year approvals were taking up to six months to process, for example Cathay Site, most recently the time period has been shortened to two months (for Shinhan BNP Paribas AM, Korea’s National Pension Service and Stichting Pensioenfonds voor Huisartsen).

Moreover, whereas Safe had awarded a $300 million quota to the Hong Kong Monetary Authority (on March 18 last year) -- triple its customary quota -- in its latest batch on March 9, Cathay Bank, Kuwait Investment Authority and Bank of Korea were each awarded $300 million, while Korea Investment Corporation was handed $200 million.

Guilloux is confident that larger quotas will increasingly be handed to foreign investors, especially to stickier institutional money.

Having said that, he also sounds a note of caution, pointing out that fund managers had found buyers for just half of their Rmb20 billion worth of RQFII quotas so far, with distribution difficulties and near-clone products having thwarted sales efforts.

“If RQFII’s debut has taught Safe anything, it is that plays away from home require skill, experience and active cooperation with offshore buyers,” notes Guilloux. “RQFII’s success may ultimately rely on bringing foreign distributors and manufacturers into the fold.”

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