Raft of cross-border China reforms revealed

New rules will allow foreign investors to have controlling stakes in domestic Chinese trust firms, Z-Ben chief says. QFII reforms will include the introduction of daily repatriation and a $5bn quota cap.
Raft of cross-border China reforms revealed

A series of reforms to China’s cross-border investment market have been revealed by a senior strategist, and are set to be announced in the coming days and weeks.

The reforms will include the introduction of daily repatriation for QFII funds and a $5 billion quota for QFII licence holders.

In addition, updated rules will allow foreign investors to have controlling stakes in domestic Chinese trust companies.

Peter Alexander, CEO of Shanghai-based Z-Ben Advisors, said that the rate of change in China’s cross-border investment market had left even a seasoned China-watcher like himself feeling “shattered”.

“The past 6 months have been truly shocking,” he told the FundForum Asia conference in Hong Kong on Tuesday, referring to the amount and speed of new regulations and market liberalisation, all of which, he says, is interconnected.

As well as the ongoing development of the three key channels for China access (the qualified domestic institutional investor scheme, its renminbi equivalent RQFII and Stock Connect), Alexander revealed some other important developments that are about to hit the market.

He said there will be no merger of QFII and RQFII, as the two schemes are incompatible, “but in the coming days or weeks, you are going to see a harmonisation that will include daily repatriation of QFII for the first time.” This will essentially bring QFII more into line with RQFII in terms of liquidity for foreign investors.

Also on China’s reform agenda was a new $5 billion quota for QFII licence holders. Previously, the quota cap for non-sovereign wealth fund/central bank QFII licence holders was set at $1 billion. But since Fidelity’s QFII quota was raised to $1.2bn last month, as reported, Z-Ben’s view is that the State Administration for Foreign Exchange has dramatically lifted the quota cap for all QFII licence holders.

Alexander previewed another new ruling coming into place next month - revised execution rules for domestic Chinese trust companies mean foreign investors will be able to have controlling stakes.

The China Banking Regulatory Commission (CBRC) has issued a proposal to liberalise foreign institutions’ holdings in domestic trust companies. The key revision will allow foreign control in trust companies, whereas the current limit for foreign ownership is 20%.

The CBRC is seeking public feedback by May 10 and Z-Ben said it will likely be finalised soon after that. The regulator has not indicated the percentage limit of any foreign control but the proposal states that a foreign institution could be an “absolute controlling shareholder”.

On the question of Stock Connect, Alexander said the almost $20 billion that has flowed in the direction of Shanghai in just six months makes him excited for the future, including the introduction of the Shenzhen-Hong Kong Stock Connect later this year.

To put that $20 billion figure in perspective, $73 billion of issued QFII quota has been allocated since 2003, while $53 billion of RQFII quota has been issued since that scheme was launched in 2012.

“Stock Connect is my favourite,” says Alexander of the three channels. “Expectations were far too high to begin with, and we are still dealing with the pre-clearing and beneficial ownership issues.” But he said the initial problems and uncertainties will be ironed out very quickly.

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