Across The Border | Old RQFII still popular despite new China investment channels

Many observers predicted the demise of China’s old renminbi qualified foreign institutional investor (RQFII) scheme when newer, more efficient mechanisms providing access to mainland capital markets came along to replace it.

But now it looks set to remain a popular channel for foreign investors, its importance apparently underlined by the decision this week to almost double Hong Kong’s quota for the scheme.

The emergence of new access mechanisms such as the bond and stock connects, and the China interbank bond market alongside the old RQFII, some analysts say, risks creating fragmented domestic capital markets with duplication in certain areas, or simply confusing foreigners trying to evaluate the best investment channel to use.

Launched in 2011, the RQFII programme allows financial institutions to buy yuan-denominated securities in the mainland, including stocks, bonds and money market investments.

This week’s decision to increase Hong Kong’s RQFII quota to 500 billion yuan (US$73.5 billion) from 270 billion yuan shows the importance of the quota system to China’s notoriously cautious policymakers, at least for now.

The separate schemes allow regulators to more easily monitor and control flows pending a potential inward surge as the nation further liberalises its capital markets. But more importantly, policymakers worry that any resulting capital outflows could be detrimental to China.