Will unified QFII/RQFII help onshore funds?

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China has proposed combining the two quota schemes, which could help foreign managers with private fund management licences seed their own funds.

The China Securities and Regulatory Commission (CSRC) released a consultation last week proposing changes to combine the qualified domestic institutional investor (QFII) and its renminbi equivalent, RQFII, programmes.

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

“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.

Although, both schemes are allowed to invest in China’s onshore equities and bonds market, more recent initiatives, such as the stock and bond connect programmes and the China Interbank Bond Market, share the same investment scope and have made it easier for foreign investors to access the Chinese onshore market.

The regulator plans to make the unified “qualified investor” programme more appealing by including private investment funds in its investment scope, according to CSRC’s draft rules.

Industry players believe that the new regulations should benefit foreign managers that both have a QFII or RQFII licence and a wholly foreign-owned enterprise (WFOE) that operates as a private fund manager.

Melody Yang, Beijing-based partner at law firm Simmons & Simmons, explained that the new rules should ease the pressure of meeting the Asset Management Association of China (AMAC)’s requirement to raise capital and launch the first fund within six months after PFM registration.

“Foreign PFMs could be seeded by their own QFII/RQFII [quotas]. PFMs are under pressure for the fund to reach a certain size in order to implement their investment strategies and maintain the operations of the PFMs. Therefore, with the contribution of the QFII/RQFIIs, this will solve the fund-raising difficulties of PFMs to some extent,” she said.

Similarly, Patrick Wong, head of China sales and business development at HSBC Security Services, believes that the new regulations should help foreign PFMs to build a track record.

“If their overseas entities can invest into their PFM funds [via their QFII or RQFII], this will help a lot to build their track record onshore,” Wong said.

The Chinese regulator also plans to include bond repurchases, financial futures, commodity futures and options in the unified qualified investor scheme’s investment scope, according to the draft regulations.

“The potential inclusion of instruments like repo and financial futures will also further increase the incentives for overseas investors to go through the [combined RQFII/QFII channel],” Wong said.

Launched in 2002, the QFII scheme’s quota was recently doubled to $300bn, with regulators giving an aggregated quota of $101.1bn to 309 QFII licence holders, according to the CSRC.

The RQFII scheme, which was launched in 2011 initially in Hong Kong, has been expanded to 19 countries and has a total quota of RMB 1.94trn ($290bn).

Around RMB 646.7bn in aggregated quotas have been given to 233 RQFII licence holders.

Entry requirements 

The regulators are also planning to relax entry requirements of the combined scheme.

If the two schemes are combined, current RQFII quota holders that do not have a QFII licence will be allowed to make onshore investments using foreign currencies, and vice-versa, Simmons & Simmons’ Yang explained.

Entry requirements for the unified scheme will also be simplified. For example, the regulator plans to remove the quantitative criteria, such as the AUM requirement previously set for QFIIs.

However, the CSRC noted that compliance requirements will be maintained, such as requirements on financial soundness, good credit standing, experiences in securities and futures investment, sound and effective governance structure and internal control system. Institutions are also required to have no record of any major regulatory punishment in the last three years or since the institution establishment.

The applications materials are also simplified and processing time is shortened to 20 days, the draft measures added.

“Entry requirements for foreign institutional investors shall be harmonised so as to attract more long-term foreign funds and prevent regulatory arbitrage,” the CSRC said.

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