Shenzhen-Hong Kong stock link heightens expectations for fresh outbound QDII, QDLP quota

PUBLISHED : Friday, 19 August, 2016, 3:57pm
UPDATED : Friday, 19 August, 2016, 9:48pm

The imminent launch of Shenzhen-Hong Kong stock connect, a sign of the mainland capital market’s return to liberalisation, has heightened speculation over other potential cross-border share-trading schemes amid a growing desire for Chinese investors to diversify their assets.

Beijing’s green light for the stock connect linking Shenzhen and Hong Kong markets, likely to be operational within four months, was interpreted as a move to allay concerns about tighter longer term regulation of the A-share market following a disastrous stock crash last year.

The share-trading link system between Shenzhen and Hong Kong represented Beijing’s willingness to further open up the capital market.

Chinese financial regulators have taken a cautious stance on liberalisation since markets were battered in mid-2015, worried that any action would trigger a further slide of key indicators.

The investment community is now anticipating a distribution of new foreign-exchange quota for the qualified domestic institutional investor (QDII) and qualified domestic limited partner (QDLP) schemes, both of which allow domestic investors to buy overseas-listed equities.

It will be up to the foreign-exchange regulator to make a final decision, but it’s apparent that appetite for buying foreign-listed equities is high
Tan Jialong, Zendai Group

“It will be up to the foreign-exchange regulator to make a final decision, but it’s apparent that appetite for buying foreign-listed equities is high,” said Tan Jialong, director of Zendai Group’s investment division. “Indeed, cross-border equity investment helps China internationalise its currency [yuan].”

Fears of rampant capital outflow and a weaker yuan prompted regulators to put on hold the QDII and QDLP schemes without granting new foreign-exchange quota since 2014.

QDII lets mainland institutions including banks, mutual fund houses and insurers raise yuan funds from clients before converting them into foreign currencies for equity investment abroad.

QDLP, a pilot scheme in Shanghai, enables foreign hedge funds to raise money on the mainland before converting them into foreign currencies for purchases of overseas shares.

Both schemes are subject to foreign-exchange quotas.

The Shanghai Free-trade Zone has also been mulling a plan to give individuals greater flexibility in buying foreign-listed shares via the qualified domestic individual investor (QDII2) scheme, which was put on hold by regulators earlier this year due to stability concerns.

The stock connect systems allow mainland investors to buy a limited number of stocks in Hong Kong. However, under the QDII and QDLP programmes mainland investors can purchase equities in markets beyond Hong Kong.

Regulators in Hong Kong and the mainland scrapped the limits on how much investors could buy on each other’s markets after announcing the decision to implement the Shenzhen-Hong Kong connect scheme. This included removing the previous investment cap imposed on the Shanghai-Hong Kong share-trading link inaugurated in late 2014.

“The needs for additional quota for the outbound equity investment systems are increasing,” said Ivan Shi, research head of fund consultancy Z-Ben Advisors. “The market is expecting diverse investment channels and investment strategies through which mainlanders can access foreign shares.”

But the stock link systems remain inadequate given increasing interest by mainland investors in buying foreign-listed shares.

Local investors have been disappointed at the lacklustre performance of A shares and economic fundamentals in China. They were expecting a strong rebound early this year after the benchmark indicator slumped 10 per cent in the first trading week of 2016 due to two trading suspensions, a result of the unsuccessful circuit-breaker mechanism.

However, at the close of trading on Friday the Shanghai Composite Index was 2.5 per cent below the 3,186.41 close seen on January 8.

“The sluggish market has exhausted investors’ patience,” said Dong Jun, a Shanghai-based hedge fund manager. “Some of them are setting their eyes on foreign stocks, which is also a move to hedge against a depreciating yuan.”

The State Administration of Foreign Exchange has the decision-making control on additional quota for the three cross-border equity investment schemes.

Beijing has been striving to keep the exchange rate stable after it carried out a one-off devaluation of the yuan last August and reformed the mechanism for setting the daily reference rate.