Premier access tipped for two-tier QFII
The rapid expansion of China’s QFII programme is forecast to eliminate the practice of renting quotas and lead to a two-tier system in which the largest managers gain premium access.
The scheme is entering an entirely new phase of development, which promises both greater opportunities and increased competition, says Shanghai-based consultancy Z-Ben Advisors.
Authorities have radically stepped up deregulation of the qualified foreign institutional investor (QFII) channel over the past few months to allow more overseas parties to access China’s onshore capital markets: there are 149 at present, collectively holding $28.53 billion in quotas.
Moreover, earlier this year Beijing more than doubled the permissible QFII quota limit to $80 billion, from $30 billion previously.
Z-Ben is forecasting that the as-yet-untapped $50 billion in quotas will be fully utilised within three years – in other words at an unprecedented pace.
This, it argues, is both a reflection of Beijing’s desire to stabilise its volatile markets by attracting more long-term capital, and also because of China’s attractiveness as pent-up global demand for emerging market assets rises in response to economic hardship elsewhere.
The consultancy notes that restrictions on inflows to the country have hitherto limited exposures to less than 1% of worldwide allocations and skewed global portfolios in favour of China-correlated markets and regional neighbours.
But QFII expansion will likely minimise the appeal of investing in sectors such as upstream industries or currencies of major trading partners correlated with China’s economic growth.
The possibility of entry liberalisation via QFII (and its offshore cousin, RQFII) should allow global allocations to better reflect China’s 8% share of international market cap, reckons Z-Ben.
Francois Guilloux, the firm’s sales director, says that the focus of the QFII programme is now firmly on asset owners such as sovereign wealth funds, insurers and pensions.
“Beijing firmly views these institutions as playing a highly integral role in the QFII programme, given both their interest and ability to invest large sums into the local market and do so with the longest time horizons,” he reflects.
Only recently, AsianInvestor reported that the UK’s $27 billion Railway Pensions Scheme was exploring the possibility of applying for a QFII licence.
At the same time Z-Ben notes that demand for QFII exposure among large global asset owners far exceeds the present quota cap of $1 billion, although Chinese regulators are believed to be about to raise the cap.
The consultancy’s thinking is that a new premium-access tier will be opened solely for the largest players and a select group of investors will be given access to quota over $1 billion.
But one obstacle in the way of even greater QFII participation by asset managers is end-demand – with QFII having delivered questionable performance to date and amid concerns over China’s economic outlook.
For this reason, more managers can expect to receive a quota of no more than $100 million, at least initially. City of London Investment Management is one such recent example.
In response to performance concerns and market volatility, Beijing moved to open up QFII to previously off-limits asset classes including the interbank bond market and the futures market.
This is seen as a groundbreaking development and an important basis for developing products to attract a greater variety of long-term investors.
But at the same time Z-Ben notes that not all foreign institutions are being as warmly welcomed to QFII as they once were.
“Although they were the first to gain entry nearly a decade ago, it is clear that in today’s environment the sell-side and their prime broking units are being relegated to the sidelines,” suggests Guilloux.
He says the practice of renting quota to anyone willing to accept abnormally high fees was never considered acceptable. “Now it would seem that market forces will be unleashed to put an end to the practice once and for all,” he adds.