QFII reforms set to accelerate as Safe lifts $1bn cap

As fund house Fidelity breaks the $1 billion QFII cap, China's regulators are hastening the liberalisation of the investment scheme. Part of the motivation is seen as a bid to boost inflows and prevent renminbi depreciation.
QFII reforms set to accelerate as Safe lifts $1bn cap

The lifting of the QFII cap has been seen as the start of further reforms to China's investment programme, which is likely to lead to the alignment of rules with its renminbi-based equivalent. 

It has also been viewed as a way of preventing a rapid depreciation of the renminbi, by liberalising the investment schemes in order to maintain capital inflows.

With the scheme's liberalisation and expansion to private equity, Chinese regulators have said they are planning to make even more changes amid predictions that the QFII quota allocation could more than double this year.  

China's foreign exchange regulator, the State Administration of Foreign Exchange (Safe), increased fund house Fidelity Worldwide Investment's qualified foreign institutional investor (QFII) quota by $800 million last Thursday, leaving it with a record $1.2 billion total quota. This has made it the first fund house to break the $1 billion quota cap.

Previously, QFII licence holders were limited to an aggregate quota of $1 billion; this was partially relaxed in December 2012 when Safe allowed sovereign wealth funds, central banks and monetary authorities to hold quota in excess of $1 billion. 

The latest development is seen as the PBOC's attempt to reform QFII and the renminbi qualified foreign institutional investor scheme (RQFII), after announcing a week earlier that it planned to reform the capital account and related schemes. 

Guo Song, director of the State Administration of Foreign Exchange’s capital account management department, last Thursday said China's regulators had been considering reform of QFII and RQFII for a long time.   

Zhou Xiaochuan, governor of the People's Bank of China, last Tuesday said the QFII scheme was not flexible enough and that reforms were being planned. He added that a series of policy changes will be unveiled to make it easier for foreign investors to invest in China's financial assets. With 2015 the final year of China's 12th Five-Year Plan, Zhou said the central bank will try to make the renminbi capital account fully convertible.

On Friday, a spokesperson for the China Securities and Regulatory Commission (CSRC) said the body was working with other regulators in studying changes to the rules of QFII, RQFII and the qualified domestic institutional investor (QDII) scheme. The spokesperson said the aim was to make the schemes more convenient for domestic and foreign players to make cross-border investments, attract more long-term inflows and expand China’s capital market. 

In a sign of expansion and the diversification of investors, KKR (Singapore) was given an RQFII licence on March 2, making it the first global private equity firm to receive one. 

Shanghai-based Z-Ben Advisors said it believed that the QFII and RQFII programmes will be aligned rather than go through a full merger. In addition, the research firm said it expected a huge increase in the QFII quota allocation this year. 

Z-Ben said in a statement: "There should be no question that radical change is underway for both QFII and RQFII. So radical in fact that Z-Ben Advisors now projects that all remaining QFII quota (just above $75 billion) will be fully issued prior to the end of 2015." 

Charles Salvador, Z-Ben's director of investment solutions, highlighted the evolution of Taiwan's own QFII scheme, which China's version had been based on. The Taiwanese version evolved into a much simpler fee-based registration system, which could be the direction China's scheme heads in. 

He added that another motivation behind the reforms was likely to be China's desire to have its equity markets included in the MSCI and FTSE indexes, which would provide a major boost to inflows. 

Meanwhile analysts have seen recent moves to restructure QFII and RQFII as an attempt to prevent a sharp depreciation of the renminbi - last year it declined by 2.5% against the dollar. 

Larry Hu, Macquarie’s China economist, sees the authorities pursuing a more flexible exchange rate policy, allowing the renminbi to strengthen/weaken in response to capital outflow/inflow pressures. 

Last year's renminbi depreciation spurred capital outflows from the country, as investors looked to lock in gains in forward markets. 

“The Chinese government is trying to keep the renminbi as stable as possible to slow down capital outflows,” said Hu.

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