US fund house Vanguard has broken new ground after winning a mega quota under China’s renminbi-denominated qualified foreign institutional investor (RQFII) scheme as it looks to add A-share exposure to its emerging market funds.
The firm’s Australian subsidiary was handed Rmb20 billion ($3 billion) by the State Administration of Foreign Exchange (Safe) last month, the largest ever single award to a foreign institution. Safe has just updated the information on its website.
It prompted Shanghai-based consultancy Z-Ben Advisors to note: “Irrespective of how the Chinese [equity] markets are behaving, the pioneer in passively managed AUM has clearly set its sights on China. [Vanguard] is unquestionably demonstrating its long-term commitment to the A-share market.”
Vanguard said the fresh quota would offer clients more access to onshore securities and greater diversification, but declined to be more specific. “It is premature to discuss our plans for the quota,” a spokeswoman told AsianInvestor by email.
But clearly the main function of the quota will be to facilitate more A-share exposure in its emerging market funds. The Vanguard Emerging Markets Stock Index Fund is the largest in the world with $49.8 billion (including ETF share class).
Vanguard started to buy A-shares last November as its emerging market equity index fund and exchange-traded fund had started to track an interim benchmark: the FTSE Emerging markets All Cap China A Inclusion Transition Index.
Vanguard has said it plans to add A-shares incrementally over 12 months without consideration of valuation to give the index roughly a 5.8% A-share exposure. A quick calculation shows that would take roughly $2.9 billion in RQFII quota to purchase. China’s benchmark CSI 300 Index has sunk 21% this year to close at 2,948 points last night.
Vanguard’s global emerging markets index fund was invested in 3,277 stocks as at the end of last year, although it does not provide a specific geographic breakdown.
Vanguard’s Australian subsidiary secured its RQFII licence in March last year – the first in Australia – and was handed an initial quota of Rmb10 billion the following month.
Vanguard now has Rmb30 billion in total RQFII quota. That makes it the third largest quota holder, but the largest global player, across China’s two mainstream cross-border investment schemes (RQFII and QFII) that allow foreign investor to access onshore securities.
Hong Kong-based CSOP Asset Management currently has Rmb47.4 billion in quota, with E Fund Management in second with Rmb31.5 billion.
Among Vanguard’s global asset management peers, Blackrock had $1.32 billion and Fidelity $1.2 billion across both RQFII and QFII schemes as of January.