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China plays the long game in latest investment quota expansion
July 17, 2013 / 6:22 AM / 4 years ago

China plays the long game in latest investment quota expansion

HONG KONG, July 17 (Reuters) - China’s surprise move to expand the size and reach of investment quotas represents the boldest reform yet this year in allowing foreign investors more access to its financial markets.

The measures unveiled by the top securities regulator on Friday are the latest in a series of steps Beijing has taken in recent months to fire up flagging investor interest, allowing foreign firms to move funds more freely into China and expanding another pilot programme to London, Singapore and elsewhere.

The China Securities Regulatory Commission (CSRC) almost doubled the quota of the Qualified Foreign Institutional Investor (QFII) scheme to $150 billion. The plan, introduced in 2002, allows investors to bring foreign currency into China to buy domestic stocks, bonds and money market instruments.

“It was a banner announcement, a signal of intent by the new CSRC chief Xiao Gang that Beijing remains committed to opening up its markets,” said Chris Powers, an analyst at Shanghai-based financial consultancy Z-Ben Advisors.

But the timing of the move was surprising, as it comes at a time when appetite for Chinese shares is at its weakest in years thanks to a slowing economy, causing once-popular funds earmarked under such investment schemes to suffer heavy outflows.

Existing quotas are already underutilised.

Before the latest expansion plan, only $43 billion of the current $80 billion quota had been used so far.

Its yuan counterpart, the Renminbi Qualified Foreign Institutional Investor (RQFII) has fared no better, with less than half of the 270 billion yuan ($44 billion) quota taken up so far.

RQFII allows investors to buy Chinese stocks and bonds using offshore yuan. It is currently available only through designated institutions in Hong Kong, but will be expanded to London, Singapore, Taiwan and other unidentified locations.

Nevertheless, bankers say these steps signal authorities are focused in expanding the yuan’s global clout by allowing more foreign companies and banks to use the currency in both international trade and to buy Chinese assets. Currently, about 12 percent of China’s trade is denominated in its own currency.

Timing-wise, China has followed a familiar script in the four-year history of its yuan internationalisation theme, always undertaking fresh reforms when it sensed investor interest was waning.

“After a long time, we are starting to see a lot of excitement from our clients and we are getting queries on what they can do under these quotas and the other reforms,” said the head of yuan trade settlement at a U.S. bank in Hong Kong.

DEBT OVER EQUITIES

Despite the buzz around the quotas, fund managers do not expect a deluge of inflows to hit China’s markets soon.

The China Enterprises Index of the top Chinese listings in Hong Kong and the CSI300, an index of the leading Shanghai and Shenzhen A-share, are down by 16 and 8 percent, respectively, since the start of the year.

Both are popular benchmarks for exchange traded funds (ETFs) under the two quota schemes. Chart: link.reuters.com/wux59t

Hong Kong-listed ETFs tracking mainland equity indexes have suffered net outflows since mid-January amounting to $4.9 billion, according to Thomson Reuters Lipper data.

For example, E-Fund’s ETF, one of the oldest ETFs under the RQFII scheme, has lost 70 percent of the units outstanding so far this year due to investor redemptions.

“China’s economy is losing some growth momentum and investors are not optimistic about the outlook for its stock market,” said a fund manager with a Chinese asset management firm who has an RQFII quota.

But that may change in the longer term. Investment bank CICC says the expansion of the QFII scheme brings China’s A-shares a step closer towards inclusion in the global MSCI emerging markets index, potentially signaling billions of dollars of inflows from benchmark funds.

Bonds may hold more promise for now. At nearly 5 trillion yuan, the mainland bond market is 40 times the size of the offshore yuan bond market, according to HSBC. It offers more variety to investors, though demand may be limited more to sovereign issues than often illiquid corporate bonds for now. ($1 = 6.1350 Chinese yuan) (Additional reporting by Michelle Chen and Saikat Chatterjee; Editing by Kim Coghill)

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