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Markets and Securities Services |
Asia
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Introduction
There are many things that investors can say
about investing in China, but “uneventful” is
not one of them. At the beginning of 2016, the
Shanghai Composite Index was down over 40%
since its height during the summer of 2015. This
volatility is not unusual in the Chinese market,
but with the imposition of a circuit breaker
(which lasted about one week) and the vast
number of stocks listed on the Chinese markets
that suspended their listing, it certainly made
for a hectic start to the year.
The access channels for foreign investors looking
to invest in Chinese equities and bonds are
numerous and constantly evolving. In a relatively
short period of time, for example, we have
seen the launch of Shanghai-Hong Kong Stock
Connect, the launch of Mutual Recognition of
Funds (MRF) scheme, the relaxation of the rules
for the Qualified Foreign Institutional Investor
(QFII) Scheme and the Renminbi Qualified Foreign
Institutional Investor (RQFII) Scheme, and the
widening of access to the Chinese Interbank Bond
Market (CIBM), while the list of countries granted
RQFII quota has increased along with the launch,
most recently, of the Shenzhen-Hong Kong Stock
Connect (SZ-HK Stock Connect).
This activity has not taken place in a vacuum. It
is driven by the desire of the Chinese authorities
to attract international investors to their
markets generally and to be included in MSCI
indices, which, at a stroke, will cause billions of
dollars to be invested into Chinese stocks, as
anyone tracking these indices will be required to
invest into the A share market.
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It is therefore
worth getting to grips with these regimes at an
early stage — to the extent that asset managers
operate index-tracking funds that would be
affected by the inclusion of China A shares in
any MSCI index in 2017, there will undoubtedly
be various regulatory hoops to jump through
both in the UK and abroad.
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Below we focus on the recent developments to
the QFII, RQFII, SZ-HK Stock Connect, and CIBM
opportunities in particular.
QFII
Background
QFII is the longest running of the access
programmes. It was launched in 2002 to enable
specified types of institutional foreign investors
to invest in Chinese equities. As of October
2016, 273 foreign institutions were approved
as QFIIs, holding an aggregate QFII investment
quota of USD84.438billion.
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The scheme has been subject to substantial change
over the years with the two most recent reforms
occurring in 2012 and 2016.
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All of the reforms have
made it progressively easier for foreign investors to
access Chinese equities. The relaxations will be of
note to institutions interested in taking advantage
of the opportunity of participating in Chinese
stock markets, and they also help to address the
concerns of retail investment managers in the UK
and elsewhere as to how to access the market while
satisfying investor protection and risk management
requirements at home.
Products and participants
QFIIs and their products are broadly classified
into three types, for State Administration for
Foreign Exchange (SAFE) regulation and for FX
purposes, namely:
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• Long-term investors, such as pension funds,
insurance funds, charitable foundations,
endowment funds, government and monetary
authorities (Long-Term Funds).
• Open-end China funds (essentially a type of
fund product managed by a QFII), which are
defined as open-end securities investment
funds set up offshore by QFIIs via public
placements, where at least 70% of assets
are invested in the securities market in China
(Open-end China Funds).
UPDATE: CHINA MARKET ACCESS
Taking a high-level overview of the various ways in which foreign investors
can access China’s equity and bond markets, this article focuses on some
of the more recent and relevant updates to and thinking on the QFII, RQFII,
SZ-HK Stock Connect and CIBM regimes in particular, each of which has its
own advantages and disadvantages for the discerning fund manager.
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