Will the recent breakthrough in QFII regulation bring the scheme back to the central stage as a preferred access channel to China’s capital market? Melody Yang of Simmons & Simmons and Eugenie Shen of ASIFMA share their insight.
24 June 2020
On 7th May 2020, Chinese Central Bank (PBOC) and State Administration of Foreign Exchange (SAFE) announced a new set of rules for QFII/RQFII account management. It lifts the quota limitation and substantially simplifies the process of investment proceeds repatriation. The top financial official also confirmed at the recent Shanghai Lujiazui Forum that the long-awaited new breakthroughs in QFII regulation by China Securities Regulatory Commission (CSRC) will also take place soon, which will scrape the QFII license eligibility requirement and largely expand the QFII investment scope. Since the launch of the Stock Connect program in 2014, The QFII program seems to have lost much of its traction as a market access channel to global investors. Will these ambitious new rules enable QFII to fight back to the central stage? What new opportunities will these new rules bring to global asset managers and investors, big and small, in their Chinese capital market adventure?
ATC Initiative interviewed Eugenie Shen, Managing Director and Head of Asset Management Group, Asia Securities Industry & Financial Markets Association (ASIFMA), and Melody Yang, Partner of Simmons & Simmons Law Firm. ASIFMA is an HK-based trade association that has regular high-level dialogues with Chinese regulators on market entry issues. Simmons & Simmons, a global law firm with a strong establishment in China, has helped many leading global investment houses in their pioneering activities in China.
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Q: What are the major concerns global investors/managers have about the QFII/RQFII scheme? To what extent do the recent PBOC/SAFE QFII regulatory changes on account management address these concerns?
Eugenie:
- The major concern of QFII/RQFII is the ability to repatriate the investment proceeds. The latest regulation eased this concern by removing the cap and simplifying the process;
- Another concern is the separation of QFII and RQFII programs, which will be eased by the combination of these two programs.
Melody:
- Historically, the main concerns of QFII/RQFII were quota limitation, distinction in using off-shore RMB and foreign currency and restrictions on investment proceeds repatriation;
- The PBOC/SAFE new rules on QFII/RQFII:
- Lift the quota limitation;
- Provide freedom to choose the denomination currency;
- Provide flexibility in timing and amount of capital deployment;
- Substantially simplify the process of investment proceeds repatriation.
Q: People are also waiting for the China Securities Regulatory Commission to announce its QFII regulation changes. A consultation paper was issued last year. What breakthroughs will be included in those new rules?
Melody:
- One of the China’s top financial leaders has confirmed this CSRC regulation change will be issued very soon at the very recent Shanghai Lujiazui financial forum;
- The new regulation will provide wider access and lower eligibility requirements to foreign investors;
- The new regulation will expand investment scope, including, for example, the facility to short the A-share market.
Eugenie:
- The expanding investment scope will cover private funds, which will allow global asset managers who set up private fund manager entities in China to get funds from their affiliate QFII/RQFIIs;
- Also, the ability to trade bond futures and repos is really important to the development of the Chinese bond market.
Q: Could you compare the relative attractiveness between QFII and other cross-border programs (e.g. Stock Connect, Bond Connect, CIBM Direct) now and after the expected QFII scheme changes?
“Each of the other cross-border programs has its own limit, but QFII will provide the widest investment universe to all the foreign asset managers.” – Melody Yang, Simmons & Simmons
Eugenie:
- For Stock Connect, one advantage is that the investment is through HK, and the trade and settlement process is much like the west. , it is an easy way for retail investors to get exposure to China without qualifications;
- The disadvantage is that the investment universe of Stock Connect is very limited. It is mainly made up of constituent stocks of indexes.
Melody:
- For Bond Connect and CIBM Direct, investors can get access to all the bonds traded in the interbank market. Investors can also trade certain derivatives under CIBM Direct;
- When the new regulation applies, QFII/RQFII will provide the widest investment universe, but the eligibility requirement is relatively high;
- In the foreseeable future, all the cross-border programs will co-exist.
Q: For smaller investors, what do you think they can benefit from the new regulation of QFII/RQFII programs?
“(Under the new rules), you can take out your money anytime you want, you can bring in money anytime you want, you can bring in a lot of money, you can bring in a small amount of money, they totally relax this area and make it very flexible.” – Eugenie Shen, ASIFMA
Eugenie:
- The regulation makes it more flexible for smaller investors in terms of the investment amount, the lock-up period, etc.;
- For investors who don’t want to do a lot of research on particular stocks, there are a lot of ETFs and mutual funds to choose from under QFII/RQFII programs.
Q: Are there any other regulatory development in the asset management sector in China you would like to share with our audience?
Melody:
- NPL (Non-performing Loan) reform, QDLP and futures market opening-up are the three interesting areas to share;
- Foreign asset managers are able to set up a wholly-owned subsidiary engaging in NPL market;
- QDLP quota will be enhanced to 5-10 times larger.
Further reading on the QFII regulatory changes, provided by Simmons & Simmons
Download ASIFMA’s report “China’s Capital Market: The pace of change accelerates“
View the full interview video
