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Citi Transaction Services | Citi OpenInvestor
RQFII
RQFII was announced in late 2011,
but was open solely to Chinese
asset management companies and
brokerages having a wholly owned
subsidiary in Hong Kong. It was also
a program that was quickly executed
upon with 22 frms approved to
operate and all of the initial RMB20bn
(USD3.1bn) in quota already awarded
with another RMB50bn (USD7.9bn)
committed to expanding the program.
The basis of the RQFII program is to
provide a more attractive investment
channel for offshore RMB (known as
CNH). These assets historically were
only permitted to be invested into the
offshore fxed income — and extremely
low-yielding — securities of Chinese
companies. The advent of RQFII —
recalling that it is solely open to
Chinese frms — allowed for products
to be developed and marketed in
Hong Kong with the asset raised then
allocated into higher yielding bonds
in the Mainland and even (capped at
20%) the A-share equities market.
The RQFII program is expected to play
an important role over the coming
decade in meeting global demand for
onshore Chinese asset classes. It, too,
will be in direct competition with the
QFII program mentioned above.
By providing a Chinese subsidiary-only
channel, regulators hope to create
a space in which these frms can
develop. However, results for the frst
wave of RQFII have been less than was
frst forecast, with barely half of the
quota used up by the end of March
2012. Some of this is attributable to
product homogeneity. The frst batch
of products was stipulated to invest
in fxed income and equity, with a
strict 80/20 split. Demand was also
impacted by the fact that nearly all
of the products were distributed by
only the Bank of China (Hong Kong),
creating a signifcant distribution
bottleneck.
Case Study: Harvest Global Investors
Harvest Global Investors (HGI) was
one of the earlier instances of a
Chinese fund manager establishing
an offshore subsidiary. The frm
has been very active in launching
products, most recently through the
RQFII framework. A high degree of
cooperation with Deutsche Bank, the
foreign shareholder of Harvest FMC,
a Chinese fund manager, has likely
also contributed to business growth.
It has also been one of the frst
offshore subsidiaries to develop
alternative business.
Distribution efforts may have been
further hindered by marketing efforts
overly focused on retail investors.
This limited the size of individual
buy-ins and neglected institutional
assets, which overall appear to be a
much more interested set of buyers.
Still, the issues currently at hand —
distribution and product development
— can be easily overcome and with
that could lead to far more demand
for RQFII products in the coming
years. Once again, however, what
is vital to take away at this point is
the setting of a stage where foreign
frms and their Chinese counterparts
will go head-to-head (QFII vs. RQFII)
in managing portfolios of onshore
Chinese assets.
Regional Competition
Over the last 12 months, regulators
have shown a preference for QFII
managers that are either based
within the region or have extensive
operational experience in Asia and
Greater China in particular. Many of
these companies, particularly those
based in Korea, Hong Kong and
Taiwan, have been eager to develop
their China capabilities in an effort
to win new business from global
investors. While the total amount
of AUM that this group (defned
as frms with headquarters in the
region) is below that of truly global
asset managers, their expertise
and regional specialization has
allowed them to grow more quickly
in providing additional exposure to
A-share markets.
Both of these competitive groups —
Asian regional managers and Chinese
subsidiaries in Hong Kong — are
expected to become a signifcant force
when it comes to attracting global
asset fows. While these frms are
at a disadvantage when it comes to
both branding and, more importantly,
access to global distribution networks
as compared to their larger rivals,
they have proven better (on average)
when it comes to generating
performance. And it is with this one
variable that Asian regional managers
and Chinese subsidiaries have the real
advantage.
Exhibit 16: Quarterly QFII Quota Approved 2Q03 – 2Q12 (USD m)
QFII quota issuance tends to be inversely related to the domestic stock market
— unsurprisingly, injections of international capital are seen as one method to
stabilize the equity market
0
500
1,000
1,500
2,000
2,500
3,000
Source: SAFE, Z-Ben Advisors