China’s widely anticipated removal of the quotas for its two prominent inbound investment schemes has been well-received by the market, but it appears unlikely to spur much larger capital inflows from overseas institutional investors any time soon.

The news of the liberalisation was announced as the global financial market continues to fluctuate under the coronavirus outbreak and the US administration openly ordered its pension funds to halt investment in China stocks.

In a bid to further open up China’s financial market and facilitate foreign investors’ participation in it, Qualified Foreign Institutional Investors (QFII) and Reminbi Qualified Foreign Institutional Investors (RQFII) will no longer need to apply for quota from the State Administration of Foreign Affairs (Safe), the foreign exchange regulator said last week.

Instead, they shall entrust their main custodians to make a registration with the Safe. The investors may choose currencies and the timing of remittance into China, and their repatriation of securities investment income are also significantly simplified.

Michael Wu, Northern Trust

Both QFII and RQFII schemes have gradually lost their appeal after the introduction of the Stock Connect schemes. It has been widely anticipated that a major overhaul is needed to maintain their relevance, Michael Wu, country executive for Greater China at Northern Trust, told AsianInvestor.

The new rule is a welcome move by Safe to continue enhancing the global appeal of QFII and RQFII to foreign investors, Melody Yang, partner at Simmons & Simmons, told AsianInvestor.

INFLOWS UNLIKELY

However, experts believe that the news alone will not prompt institutional investors to invest in the onshore markets.

Melody Yang,
Simmons & Simmons

“While the new rule will definitely increase the QFII and RQFII programmes’ appeal to overseas investors, we do not foresee that the influence, at least by the new rule itself, on institutional investors will be noteworthy in the short term,” Yang said.

One of the reasons is that with the introduction of the Bond Connect (covering fixed income products), China Interbank Bond Market Initiatives (covering fixed income and inter-bank derivative products), and Stock Connect (covering the exchange-traded stocks) programmes, institutional investors already have numerous channels through which they can access and invest in the China market.

And before the introduction of the new rule, most investors using QFII and RQFII hadn't used up their existing quotas. China doubled the QFII quota to $300 billion in early 2019, but as of April 30 only $114.66 billion of quota was granted to 295 qualified institutional investors. For RQFII, only Rmb713.09 billion of quota was granted to 227 investors as of April 30, while quota limit is Rmb1.94 trillion, according to Safe.

On the other hand, while the new rule simplifies procedural requirements to facilitate the repatriation of capital and profit, there is no apparent reason to believe it would cause large amounts of capital outflows either, Yang said.

Back in June 2018, the central bank and Safe already amended its existing laws to remove the three-month lock-up period on repatriation of principal and 20% limit on repatriation of principal and profit of QFII investments, but even this amendment has not triggered huge capital outflows, Yang said.

Wu also echoed the opinion. QFII and RQFII are designed to attract long term institutional investors and they invest in China because of its long-term potential. As evidenced by the Stock Connect schemes, there are inflows and outflows on a daily basis, but accumulated inflows greatly outweigh outflows to date, he said.

MERGING QFII, RQFII?

In fact, the China Securities and Regulatory Commission (CSRC) had proposed to merge the two schemes early last year in an effort to raise their waning appeal with foreign investors. Market experts believe that the plan is still under consideration.

It is possible that the regulator may merge the two into one regulation, although still calling them QFII and RQFII separately. The two schemes will continue to exist because they have distinctive features on funding currencies, which are useful for different strategic purposes, Wu said.

The merger of the two schemes put forward by CSRC would be issued in the foreseeable future. The new Safe rule, in many aspects, echoes with the draft CSRC rule set to merging of the QFII and RQFII schemes, Yang said.

When CSRC proposed to combine the two schemes, it was considering to enlarge the investment scopes of QFII and RQFII to include shares traded on the National Equities Exchange and Quotations (China’s OTC board), private securities investment funds, bond repo, bond index futures, commodity futures and options.

Foreign institutional investors can now invest in exchange-traded shares, bonds, public securities investment funds and stock index futures through the existing QFII and RQFII schemes.

The expansion in investment scopes will likely happen too. The abolishment of investment quotas, coupled with future rule relaxations, will attract more capital from global institutional investors who seek a straightforward, yet integrated access channel to invest in the China market, Yang said.