US gets big RQFII quota amid rising tensions

Despite rising tensions between China and America over trade and the South China Sea, the US will receive its first Rmb250 billion ($38 billion) in quota under the mainland’s renminbi qualified institutional investor (RQFII) scheme. 

It may have come later than quotas for other major markets, but is only a little smaller than Hong Kong’s Rmb270 billion and more than double the next biggest quota – South Korea, with Rmb120 billion (see table below). 

The move – which will allow US asset managers and owners to invest directly in Chinese securities using yuan raised offshore – was announced yesterday by the mainland central bank during the two-day Strategic and Economic Dialogue between the two countries in Beijing. However, it was not made clear which US city would be the renminbi settlement hub.

The quota award is widely seen as part of the push by China for A-shares to be included in MSCI’s global emerging-market indices, which would boost investment into mainland stocks. The index provider is set to make a decision on June 14, and the mainland authorities have been busy removing potential obstacles to this happening in recent months, as reported.

Moreover, the US quota comes just a week after New York-based BlackRock, the world’s biggest asset manager, received Rmb20 billion in RQFII quota through its Singapore office on May 30. 

US fund houses using other jurisdictions to access China are also likely to win additional RQFII quota, said Scott McLaren, Hong Kong head at US custody bank BBH.

The US quota award is part of China’s drive to liberalise its capital markets amid concerns over the country’s economic slowdown – which has also led Beijing quietly to close off some capital exit routes (such as the keenly awaited QDII2) from the country in recent months. 

Meanwhile, the mainland authorities are trying to broaden usage of the renminbi internationally and to attract capital after big outflows this year, noted Red Pulse, a Shanghai-based research firm.

Indeed, Pan Gongsheng, head of China’s State Administration of Foreign Exchange (Safe), said on June 1 that the mainland currency regulator planned to reform the RQFII scheme based on the newly relaxed QFII mechanism introduced in February. But he did not give further details. 

The new QFII rules assign foreign asset managers quota based on their total AUM rather than requiring them to apply for it, as reported.

China launched the RQFII scheme with initial quota of Rmb20 billion for Hong Kong in December 2011. The programme has since been rolled out to 17 countries globally, with asset managers in Hong Kong, Seoul and Singapore the biggest holders of quota. 

The question now is: will US investors show demand to match the size of the new quota?

RFQII scheme and holders