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China’s regulator signals further opening

The QFII scheme is a transitional step towards China's orderly opening of its capital markets, according to the 2018 annual report from State Administration of Foreign Exchange (Safe).

“We will continue to deepen the reform and opening up of the capital market and steadily promote the convertibility of RMB capital projects” while limiting the risks of cross-border capital flows, the regulator re-affirmed in the report, which was released this week.

As of the end of 2018, the Safe had approved 287 companies for the qualified foreign institutional investor (QFII) quota, worth $101.06bn, and 205 companies for the renminbi QFII quota, worth $646.7bn, according to the report.

“We will continue to promote new measures of reform to further optimise and facilitate cross-border securities investment by qualified institutional investors, and promote the two-way opening of domestic capital markets,” the report noted.

Both the QFII and RQFII programmes involve money going in to China. They allow foreign institutional investors, including fund managers and institutions, to invest in China’s onshore equities and bond markets, within specific quotas.

In January, the China Securities and Regulatory Commission (CSRC) released a consultation proposing changes to combine the QFII and RQFII programmes.

“The two schemes have been operating in a steady manner, playing a positive role in channelling long-term foreign capital into China,” the regulator said in the consultation.

In the same month, the Safe  lifted the QFII threshold to $300bn from $150bn after three years of reforms to the scheme, which included eliminating the 20% remittance ceiling and cancelling the three-month lock-up period requirement for new and existing QFII participants from mid-June 2018. In addition, QFIIs were allowed to perform hedging to manage foreign exchange risks.

Beginning in 2018, a number of foreign managers increased their RQFII quotas, including State Street Global Advisers, UBS Asset Management, Blackrock and Aberdeen Standard Investments.

The Safe also noted that as of the end of 2018, it had approved 152 companies for the qualified domestic institutional investor (QDII) quota, worth $103.23bn.

However, QDII funds involve money leaving China — mainland firms use them to invest in offshore assets. The government has gated QDII quota in the past in order to control capital flight.

QDII funds accounted for less than 1% of China’s RMB11trn ($1.6trn) mutual fund market in 2018, according to data from Morningstar Direct.

 

Part of the Bonhill Group.