After a quiet summer for China’s renminbi qualified institutional investor (RQFII) scheme, the mainland authorities have renewed their push to use the programme to drive RMB internationalisation.

China’s central bank doubled Singapore’s RQFII quota to Rmb100 billion ($15.7 billion) after President Xi Jinping’s visit to the Lion City over the weekend, after boosting South Korea’s allowance by 50% to Rmb120 billion on November 1 following Prime Minister Li Keqiang’s trip to the country in late October. The RQFII scheme allows institutions to use offshore RMB to invest in onshore Chinese securities.

These moves reflect the prevailing level of demand for RQFII quota (see table below), suggesting that the likes of Australia, France and the UK have a little longer to wait before they receive more quota.

  RQFII HOLDINGS AS OF OCTOBER 2015

Market

Total quota (RMB billion)

Quota issued (RMB billion) Quota holders Quota issued as % of total
Hong Kong 270 270 79 100
Singapore 50 31.5 20 63
Korea 80 57 27 71
UK 80 22.8 12 29
France 80 17 4 21
Germany 80 6 1 8
Australia 50 10 1 20
Switzerland 50 5 1 10
Canada 50 0.225 1 0

Source: State Administration of Foreign Exchange

Meanwhile, Bank of China and Industrial & Commercial Bank of China won RQFII licences in Luxembourg from the China Securities Regulatory Commission on October 27 and November 2, respectively, reported state media Xinhua news on Monday (November 9). This means the banks can manufacture products in Luxembourg to invest onshore in China. 

Other likely candidates to obtain RQFII licences there are Agricultural Bank of China, China Construction Bank and China Merchants Bank, which have set up branches in Luxembourg over the past two years. 

The Chinese authorities are clearly using the RQFII scheme to encourage mainland financial institutions to become more globalised.

The RQFII moves have come ahead of the International Monetary Fund’s review of its Special Drawing Rights (SDR) currency basket, which is due to happen by the end of the year. China is keen for the renminbi to be included in the basket, which would be another step towards it being used as a reserve currency.

The Lion City quota increase was “in response to the strong interest by Singapore-based asset managers and investors to invest in China”, said the Monetary Authority of Singapore in a statement.

So far 20 companies have received a total of Rmb31.5 billion (63%) of Singapore’s RQFII quota (which received its initial Rmb50 billion in October 2013), while 27 companies have been handed Rmb57 billion (71%) of South Korea’s RQFII pool (which received its initial Rmb80 billion in July last year). 

Media reports suggested London might receive extra quota when Xi visited the UK last month, but that failed to materialise – perhaps reflecting the fact that there is substantially less demand for the scheme in the British capital.

Meanwhile, Hong Kong has not received fresh quota since September last year, when the city’s Rmb270 billion ran out.

China’s decision to expand the RQFII scheme in places other than Hong Kong reflect a determination to drive RMB internationalisation further afield, noted Shanghai-based research firm Red Pulse, which expects interest in mainland securities to grow as the mid-year equity market volatility has waned.

Also seen as contributing to China’s reluctance to raise Hong Kong’s RQFII quota is the fact that there is unused quota in the Shanghai-Hong Kong Stock Connect, which provides an alternative channel for accessing stocks listed in Shanghai.  

China's central bank is pushing for the renminbi to be included in the IMF’s SDR basket this year. For that to happen, China needs to broaden access to its capital markets and extend various inbound and outbound investment schemes. 

The central bank further opened up the Shanghai free trade zone with the late-October confirmation that it would launch the so-called qualified domestic institutional investor 2 (QDII2) scheme, which will target wealthy individual investors.