Quota grant of 250 billion yuan for US comes ahead of MSCI decision on inclusion of China equities

PUBLISHED : Wednesday, 08 June, 2016, 7:14pm
UPDATED : Wednesday, 08 June, 2016, 7:14pm

China’s grant of a multibillion-yuan quota to the United States under its renminbi qualified foreign institutional investor (RQFII) programme is seen as a well-timed push for inclusion in an MSCI index, analysts said.

Yi Gang, deputy governor at People’s Bank of China, announced that the US would receive 250 billion yuan in RQFII quota on Tuesday at the Strategic and Economic Dialogue talks in Beijing, without providing further details, Reuters reported.

This is the first grant of RQFII quota to the US, and the second largest by volume next to Hong Kong’s 270 billion yuan. The quota allows foreign institutions using offshore yuan to buy mainland stocks, bonds and other financial products.

This move ... should please MSCI as accessibility has been a bone of contention
Brett McGonegal, Capital Link International

The move comes before New York-based leading index compiler MSCI announces on June 15 whether to add China’s A-share market into its Emerging Market Index. The index provider has been discussing the issue for three years.

The new quota will greatly enlarge the total RQFII programme quota, which stood at 501.77 billion yuan at the end of May.

Brett McGonegal, chief executive of Capital Link International, said: “Certainly this move aims to offer increased access to the mainland markets and should please MSCI as accessibility has been a bone of contention.”

For foreign investors, among concerns over trading suspensions, volatility, and daily liquidity, access to the A-share market is “definitely” one of the biggest issues ahead of MSCI inclusion, McGonegal said.

Currently, foreign institutions can only enter the A-share market through RQFII or QFII quota, and the Shanghai-Hong Kong Stock Connect scheme.

“It is certainly a strong, well-timed nudge towards MSCI inclusion. That said, MSCI has always been a question of when, not if,” said Chantal Grinderslev, manager at Shanghai-based Z-Ben Advisors, a fund consulting agency.

From a policy perspective, this move demonstrates China’s continued preference for opening up more access points rather than consolidating existing cross-border channels, Grinderslev said.

Despite the timing, the quota grant is part of a long-awaited process between the world’s two largest economies.

China has offshore yuan centres in major financial centres such as London, Hong Kong, Singapore and Luxembourg, to promote international use of the yuan. However, New York is still off the list.

The US is the world’s largest asset-management market and the demand for yuan-denominated transactions will grow.

For China, it marks great progress for the internationalisation of the yuan, said Elvin Yu, head of international sales and client relationships at ICBC Credit Suisse Asset Management (International).