Underused Connect hampers HK's bid for RQFII quota

China's regulators want to see more use of Stock Connect before they will be willing to grant Hong Kong additional RQFII quota, a senior market watcher tells an AsianInvestor forum.
Underused Connect hampers HK's bid for RQFII quota

Hong Kong is likely to be granted additional RQFII quota only when Chinese regulators see evidence of greater use of Stock Connect, an AsianInvestor forum heard last week.

Since the city used up all its quota in the scheme in September last year, there have been repeated calls for China to allocate more to meet demand.

But a senior market watcher said that regulators want managers to look beyond Hong Kong for their business and have noted that the Stock Connect trading link is still not at full capacity, months after its launch.

Stephen Baron, deputy director of strategic solutions at Shanghai-based research house Z-Ben Advisors, explained why Hong Kong’s quota for the renminbi qualified foreign institutional investors scheme had not been refreshed yet. He was speaking at AsianInvestor’s 4th Art of Asset Management forum in Hong Kong last Tuesday.

“Why the mainland regulator is not giving Hong Kong more quota, it is a good question,” said Baron.

“One [reason] is the launch of Stock Connect which has not had full utilisation of its quotas, and these managers have the potential to access the market through the programme, at least certain parts of the market like the Shanghai [listed] stocks.

“[The regulator] wants Chinese managers to become more internationalised, not just to stay in Hong Kong, [but to] look at what else they can do globally. For some of the aggressive managers we are starting to see they are doing that.”

He added: “For these Chinese managers to try to access the RQFII scheme in other places, for example, Singapore regulation is pretty relaxed, when a manager gets a licence in Singapore they can get an RQFII quota there.”

Chinese managers have been expanding rapidly overseas, with China Construction Bank’s London subsidiary receiving its RQFII licence from the China Securities Regulatory Commission (CSRC) in March; Harvest Funds (HK) established its London office in the same month; and CSOP plans to open a New York office.

The RQFII scheme was first launched in Hong Kong in late 2011, but the city ran out of its total quota of Rmb270 billion in September last year. In all, 19 out of 98 RQFII licensed managers’ Hong Kong offices are waiting for fresh quotas, including BNP Paribas Investment Partners (Asia), BEA Union Investment Management, Principal Global Investors (Hong Kong), Invesco Hong Kong and Baring Asset Management (Asia).

Although China’s foreign-exchange regulator was said to be working to expand the quota for Hong Kong last October, and the city’s officers and fund managers were lobbying for an expansion in September, the waiting game is not over.

Alexa Lam, the former deputy CEO of Hong Kong’s Securities and Futures Commission, urged Hong Kong-based RQFII managers to start looking into how to work with players in other markets which still have plenty of quota.

Despite Hong Kong’s RQFII quota shortage, China has continued to roll out the renminbi cross-border programme rapidly and globally. In all, 25 managers outside of Hong Kong have won quotas from the State Administration of Foreign Exchange, while 13 Korean managers won a total of Rmb30.5 billion ($4.9 billion) in quota, making Seoul the second-largest RQFII centre after Hong Kong.

Baron noted that both QFII and RQFII are expanding quickly this year, in terms of quota size - Fidelity Worldwide Investment was granted an additional $800 million QFII quota in March and broke the cap of $1 billion; and KKR Singapore became the first private equity firm to be awarded quota, winning Rmb3.5 billion in March. 

In a poll during the forum, 81% of participants said they expected regulatory change in China to increase. But over the next six months, Baron said he expected a number of developments, including: Shenzhen-Hong Kong Stock Connect to be announced this month or next month and go live in October; an expansion of the Shanghai-Hong Kong Stock Connect; a potential extension of Stock Connect to other Asian countries; majority foreign ownership permitted for areas such as trust and insurance companies; and a version of the qualified domestic institutional investor (QDII) scheme for individuals could be launched in Shanghai’s free-trade zone.

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