Getting to grips with RQFII

PUBLISHED : Monday, 12 March, 2012, 12:00am
UPDATED : Monday, 12 March, 2012, 12:00am


Renminbi qualified foreign institutional investor (RQFII) is a mouthful. Clearly the name comes from a policymaker and not a marketing person. Indeed, the scheme arrived courtesy of the China Securities Regulatory Commission, the mainland's main markets regulator.

The plan allows offshore asset managers to enter the mainland and invest, then package the investments for sale offshore, via a fund.

It is another step on the way to full internationalisation of the yuan (by 2015, say those who track such things).

Before letting everyone invest in the mainland and lifting all capital controls, Beijing is letting some offshore institutions in, subject to strict controls.

RQFII is kin to the qualified foreign institutional investor scheme, launched in 2002, which also allowed offshore investors to invest in mainland securities.

QFII and RQFII are conceptually equivalent, but differ in subtle and important ways. By regulation, QFII investments are denominated in offshore currencies, such the US dollar, yen or euro. RQFII investments are denominated in yuan.

QFII approved institutions may buy mainland-listed equities without restriction. RQFII, however, caps the amount of equities held in a fund at 20 per cent.

QFII only gives licence holders access to only about 2.8 per cent of bonds available on the mainland, whereas RQFII firms have the ability to access 100 per cent of the bonds, according to HFT Investment Management. As such, QFII funds tend to be equity related, but RQFII schemes are virtually all bond funds.

Both RQFII and QFII had sluggish investor responses at first. QFII funds were notoriously slow starters, not least because in the early years (2003-06) the mainland stock market was locked in an epic downturn. No one was buying mainland shares - foreign or domestic. But it turned around and today 108 institutions have been granted US$30 billion of QFII quota, according to HSBC.

Jelle Vervoorn, executive director of HFT Investment Management (HK), expects RQFII to do the same: 'We should not draw our conclusions about RQFII too early. QFII was not a hit when it first launched, but in the end, it was popular.'