Don’t expect QFII to disappear now that the second Stock Connect is ready for lift-off
New link to allow trade in 881 Shenzhen stocks up to a value of 13 bn yuan a day via HKEX, while mainlanders will be able to trade 417 Hong Kong stocks, up to 10.5bn yuan
With the official launch date finally announced for the much-anticipated Shenzhen–Hong Kong Stock Connect, institutional investors are confident the share trading link is likely to attract a significant number of the world’s biggest international fund managers away from the country’s two qualified foreign institutional investors (QFII) schemes.
QFII allows limited access to overseas financial institutions, using a quota scheme to use offshore yuan to buy mainland shares A-shares, including stocks, bonds and money market investments.
Mark Mobius, Templeton Emerging Markets Group executive chairman, who manages US$26 billion for clients in emerging markets including in Hong Kong and mainland China, says he as a huge fan of the connect scheme, as are many of his peers in the industry.
“QFII was only an interim measure for China to open up its market – I expect the Stock Connect schemes to eventually replace QFIIs long term,” Mobius said.
China has been loosening its capital measures since the opening up process in the 1990s. It first opened a US-dollar-based QFII scheme in 2002, to allow around 150 large fund houses, banks or insurance companies quotas to invest in A-shares. A yuan-denominated scheme was launched in 2011.
But from now on, the authorities hope the Stock Connect scheme will become the main avenue through which foreign investors will trade in mainland stocks.
The Shenzhen Stock Connect goes live on December 5, allowing international investors to trade in 881 Shenzhen stocks up to a value of 13 billion yuan a day via HKEX, while mainlanders will be able to trade 417 Hong Kong stocks, up to 10.5 billion yuan daily quota.
It follows the launch of the Shanghai-Hong Kong Stock Connect, started in November 2014, which allows international investors to trade in 568 Shanghai listed A-shares, and 318 Hong Kong stocks.
Mobius described the connect scheme “as much better option” the QFII as it as the latter has lock-up period of three years for closed-end funds – investment products with a fixed number of shares trading on the stock exchange – and other type of funds, meaning investors can only take 20 per cent of their funds money out every three months. The renminbi qualified foreign institutional scheme (RQFII) also has a lock-up period of six to 12 months.
Both these effectively put hefty restrictions on fund managers freely moving funds anytime they want.
“The Stock Connect has no lock-up period and is far more flexible and attractive for international investors to trade A-shares,” said Eleanor Wan, chief executive of BEA Union Investment Management.
“We use the [Shanghai] stock connect all the times,” she said, and fully expects her fund house to invest using Shanghai-Hong Kong Stock Connect.
“We have conducted a lot more A-share trading on Stock Connect than using the QFII. Its biggest hurdle is that each fund house or firm is restricted by quotas, while the Stock Connect has no such limits.
“We have more freedom to trade, and the Stock Connect scheme is also easier for us to design our portfolio,” she said.
Louis Tse Ming-kwong, director of VC Brokerages, said QFII was only tailor made for largest brokers and fund houses, while Stock Connect is suitable for all kinds of financial firm, even small time players.
“From Hong Kong’s perspective, the Stock Connect schemes benefits the city more than QFII. Under QFII, foreign fund managers with QFII quotas could trade in the mainland market from their home countries. However, Stock Connect requires them to trade through Hong Kong, Shanghai or Shenzhen brokers which will benefit the local market,” Tse said.
Christopher Cheung Wah-fung, lawmaker for financial services sector, however, believes both the QFII and RQFII schemes will continue.
“Whenever Chinese leaders visit other countries, they like to offer the QFII and RQFII quotas as a diplomatic gift. There is special meaning for these scheme to keep operating – to offer functions the stock connect cannot offer,” Cheung said.
Ken Wong, Asia equity portfolio specialist at Eastspring Investments, said after the Shenzhen-Hong Kong Stock Connect is up and running, there will still be demand for QFII or RQFII because not all mainland stocks are offered though Stock Connect.
“However, if more Shanghai and Shenzhen stocks are offered via Stock Connect in future, there should be no major reason why investors wouldn’t use the programme for A-share trades,” Wong said.
“Bear in mind, though, when the Hong Kong markets are closed during public holidays, international investors won’t be able to buy or sell mainland stocks on those days,” he said, adding the QFII scheme would useful in those instances.
Christopher Cheung Wah-fung, lawmaker for the financial services industry, also underlines that the Stock Connect scheme will be suspended during both Hong Kong and mainland public holiday, which in total represent around 10 per cent of trading days.
Mark Konyn, group chief investment officer of AIA Group, said the QFII schemes were simply earlier versions of Connect, allowing cross-border participation, but they will remain relevant for certain institutional investors.
“The connect system provides more immediate liquidity and offers investors relatively straight forward access to the market. As such it has proven popular with individual investors and financial institutions requiring liquidity and flexibility,” Konyn said.
Brett McGonegal, chief executive of Capital Link International, said Beijing last year relaxed the rules on QFII and RQFII, to allow foreign institutions greater buying power in the domestic equities and debt markets, up to their “base quota” or more simply defined, their asset under management.
He added there is now no need for approval by SAFE (The State Administration of Foreign Exchange) or to limit quota sizes after the rule change.
“This is a very important step in opening up the market and lifting restrictions,” McGonegal said.
The People’s Bank of China and SAFE have worked together to provide a landscape that is accommodative to foreign funds looking to have easier access, and flow of capital into Chinese markets.
Joseph Tong Tang, the chairman of Morton Securities, says he expects many more international investors to apply for quotas under QFII and RQFII, suggesting there is still strong interest in the scheme.
Sally Wong, Hong Kong Investment Funds Association’s chief executive, said Stock Connect and the QFII schemes will continue to operation.
“They will remain mutually exclusive, as both can gain exposure to various channels.
“But the further flexibility and enhancements provided by the Connect programme make it likely more international investors will choose it as their core vehicle, supplemented by QFII and RQFII,” she said.