This week Beijing finally handed new quota to Hong Kong under the renminbi qualified institutional investor (RQFII) scheme, after hitting the original Rmb270 billion cap back in October 2014.
But has the near-doubling of the quota to Rmb500 billion ($73.55 billion) come too late, in light of market developments in the past year or so? Have the QFII and RQFII cross-border investment programmes had their day, now that Bond Connect, Stock Connect and China interbank bond market direct access are available?
Not so fast, say market participants. There will likely be a steady increase in usage of the Connect direct trading schemes between China and Hong Kong. But there are also good reasons why RQFII is expected to prove useful for some time.
A cheaper option
APS Asset Management still largely uses QFII and RQFII to access China A-shares, said Wong Kok Hoi, founder and chief investment officer of the Singapore-based equity boutique. That’s largely because doing so is three or four times cheaper per trade than using Stock Connect, he noted, although the latter “has its conveniences”.
Still, he told AsianInvestor, “I wouldn’t expect to stop using QFII or RQFII any time soon. They will only outlive their usefulness when [Chinese] capital controls are completely removed.” And that means the schemes will remain in use for another three to five years, he reckoned.
Asked if APS AM would seek to increase its RQFII quota, Wong said the firm had a sufficient amount for the time being, with a total of around $600 million across QFII and RQFII. “But obviously as demand for RQFII products increases, we would apply for more,” he noted.
That might happen as a result of APS’s new alliance with Rothschild Asset Management’s US business, which should provide additional demand for Chinese exposure from the latter’s American clients.
Meanwhile, Wong reckoned the new quota limit of Rmb500 billion would be sufficient for at least another two years.
Others agreed there was life in RQFII yet. “I don’t think RQFII will be redundant; it has taken so long to establish the scheme,” said Martin Wong, Asia-Pacific head of exchange-traded solutions at BNP Paribas Global Markets.
“But utilisation may shift more to [the] Connect [programmes],” he told AsianInvestor. “Ideally, there are multiple ways to access the market.” Both institutional and retail investors are shifting from RQFII, he noted.
Ultimately, however, the Connect and RQFII schemes are very different in nature, said Martin Wong. Stock Connect facilitates daily flow, so is more suitable for trading in and out, he noted, while RQFII is more suitable for buying and holding.
Moreover, the Stock Connect quota has a daily cap, he added; once it is used up, participants must rely on others freeing up quota so they can buy more. But with RQFII, investors have their own quota, so they don’t need to rely on others.
Daily quota issues
Indeed, the Connect scheme’s daily quota is the main reason why investors are still using RQFII for passively managed funds, said Barnaby Nelson, head of investors and intermediaries for Northeast Asia at Standard Chartered. “If you hit the daily quota, you cannot buy any more shares, and that may create tracking errors on that day. For ETFs, that is an operational problem.”
For instance, CSOP Asset Management had to delay the listing of an ETF in 2015 because of a shortage of RQFII quota, as reported.
The other main reason for using QFII and RQFII is that the cost to migrate holdings out of the two schemes to other mechanisms is very expensive, Nelson told AsianInvestor.
To reduce their QFII holdings, investors must sell them on the open market and buy them back again through, for example, Stock Connect, he explained. “There is no off-the-market way to exit QFII and RQFII yet.”
The message is clear: don’t write off the two schemes just yet.