Relaxation of RQFII rules in sight

The mainland's securities regulator may soon relax rules for qualified foreign investors to put their offshore yuan holdings into domestic capital markets, which could lead to a fresh wave of fund flows into stock markets, Xinhua said yesterday.

The China Securities Regulatory Commission first allowed foreign fund management companies and securities firms to invest qualifying offshore yuan in domestic capital markets under the renminbi qualified foreign institutional investor (RQFII) scheme in late 2011. Now it plans to allow more financial institutions to participate in the scheme, according to Xinhua.

The fixed investment ratio between debt and equity of 80:20 was also likely to be eliminated, it reported, allowing foreign investors to put more money into stock markets. Under current RQFII rules, foreign investors must invest at least 80 per cent of their qualified funds in bonds.

"The moves, not officially announced but widely anticipated, indicate the government is eager to boost the use of the yuan in investment markets, after runaway success in promoting its use in trade-related transactions," Raymond Yeung, a China economist at ANZ Banking in Hong Kong, told the South China Morning Post.

The regulator has allotted 270 billion yuan (HK$332.66 billion) in RQFII quotas so far, but 200 billion yuan remains unused in Hong Kong due to the restrictive nature of the quotas.

Yeung forecast Beijing would further relax the scheme to allow individual investors to participate this year, prompting even greater use of the yuan in areas such as Mandatory Provident Fund investments.

"Relaxing the path of foreign money into China could help balance capital inflows and outflows by prompting higher cross-border yuan currency flows," a Hong Kong-based RQFII fund manager said, suggesting the scheme had started to gain traction on the back of improving market conditions at home.

Few would expect the new RQFII could instantly boost the domestic stock markets because the heavy involvement of retail investors makes them more volatile. That volatility may present a challenge to offshore institutional investors, given their freedom to invest more heavily in the mainland.

Returns on RQFII funds last year were also unattractive, averaging 3 to 4 per cent, compared with a more than 22 per cent rise in the Hang Seng Index.

But market participants have high hopes that the new scheme will benefit other financial institutions such as insurance companies and banks in Hong Kong as Beijing further encourages foreign holdings of yuan assets.

Monetary Authority chief executive Norman Chan Tak-lam said last year that Guo Shuqing, the head of the CSRC, had vowed to relax the RQFII eligibility requirements. The scheme is now limited to overseas units of mainland financial institutions.