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.