Through train threatens sales in quota scheme
The upcoming "through train" scheme to allow mutual stock trading between Hong Kong and Shanghai poses a potential threat to the sales of funds that are using an existing quota scheme to invest onshore, especially for retail-oriented exchange traded funds (ETFs).
Currently, foreign investors can buy Chinese stocks or bonds through the qualified foreign institutional investor (QFII) or renminbi qualified foreign institutional investor (RQFII) programmes.
The two schemes used to be the only options for investors to buy mainland stocks and those investors have to be institutional firms. If retail investors want to gain exposure to A shares, the only way open for them is to buy the ETFs that track the overall performance of those A shares.
The biggest change the through train scheme will bring is that retail investors now have direct access to buy individual A shares, and vice versa.
"Everyone in the market now has a big question mark at heart on what this would mean to RQFII or QFII managers," said Stefano Chao, investment manager at AZ Investment, whose parent Azimut is the manager of the largest offshore yuan fund in the world. "The quota used to be a unique advantage for us, but the scheme may change the rules of the game."
Some market players doubt the RQFII and QFII markets will remain viable.
"The scheme will make the QFII and QDII schemes redundant over time," said Sean Darby, global equity strategist at Jefferies.
Permitted quotas in the initial phase of the through train scheme are set at 300 billion yuan (HK$377 billion) for the "northbound through train" and 250 billion yuan for the "southbound through train". While a simple calculation implies the total quota would be exhausted in a month, the Chinese regulator has left the door ajar to make adjustments.
While critics say it is still too early to gauge the impact of the pilot programme, as the cost of investing is still unknown, sales of retail-oriented RQFII and QFII products are being scrutinised closely.
"The scheme does offer an alternative route of exposure for retail investors and it is interesting to see how that would affect the demand for A-share ETFs when the scheme is put in place hopefully early next year," said Sarah Reeve, senior associate at Z-Ben Advisors, a Shanghai-based research firm.
Since June last year, the trend in net inflows to the majority of the A-share ETFs have been declining or have remained flat as concerns about a slowdown in China's economy mounted, according to data provided by BlackRock which in turn pointed to figures from Bloomberg, ETF issuers and Goldman Sachs Securities.
Only the two most liquid A-share ETFs - iShares FTSE A50 managed by BlackRock Asset Management and CSOP FTSE China A50 ETF managed by CSOP Asset Management - continued to see net inflows pick up, according to the data.
"A shares have been badly performing as a whole and it is widely deemed as a 'cherry picking' market, so when the gate is opened to allow purchase of individual stocks, there is a challenge to some ETF products that are tracking the overall market," said a Hong Kong-based fund manager who manages an active RQFII equity fund.
As of March 28, 241 foreign investment mangers have been granted US$53.6 billion worth of QFII quota to invest in onshore securities. Meanwhile, a total of 62 firms were granted 200.5 billion yuan worth of the QFII quota to invest offshore yuan into onshore securities.
China Securities Regulatory Commission chairman Xiao Gang said at the Boao Forum last Thursday that Beijing would continue expanding the QFII scheme's size, adding that the through train scheme will have a "substitution effect" on the existing QFII programme. "There is no contradiction," he said.
Additional Reporting by Phoenix Kwong