Beijing revises RQFII rule in bid to attract more foreign investment in A shares

PUBLISHED : Tuesday, 06 September, 2016, 9:50pm
UPDATED : Tuesday, 06 September, 2016, 11:00pm

Beijing has offered yet another olive branch to overseas institutions by relaxing rules governing the renminbi qualified foreign institutional investor (RQFII) scheme, effectively giving foreign investors greater flexibility and freedom in buying mainland Chinese A shares.

The revised rule, published ahead of the inauguration of the Shenzhen-Hong Kong stock connect scheme, adds to the weight of evidencethat Chinese regulators are taking a proactive approach to entice more foreign funds into the volatile market.

The State Administration of Foreign Exchange said it will grant RQFII quotas to foreign investors based on asset size, rather than allocating a specified amount as before.

The rule is aimed at easing the approval procedure for RQFII quota that overseas investors can use for A-share purchases.

If the overall size of assets under management by a foreign institution grows, the quota will rise accordingly.

Institutional investors can still apply for additional quota if they want to increase A-share investments beyond their existing quota.

“It is a positive message to global investors that Beijing hopes they can play a bigger role in the domestic stock market,” said He Yan, a hedge fund manager with Shanghai Shiva Investment. “It’s obvious that China will further open up the market.”

Since the establishment of the mainland’s stock market in the 1990s Beijing has been cautious when it came to foreign investors’ participation in the fledging market.

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Last year the China Securities Regulatory Commission, in response to a boom-to-bust cycle that wiped out US$5 trillion of market capitalisation, launched investigations into foreign investors’ short-selling practises, describing some of the funds as “malicious short-sellers” that caused the sharp falls.

Under the RQFII system, foreign investors can raise yuan funds offshore to buy into mainland-listed companies and bonds.

In Hong Kong, the 270 billion yuan RQFII quota has been used up although quotas are also available in about 20 markets outside the mainland.

Analysts said the relaxation of the RQFII rule is symbolic rather than substantive given the imminent launch of the Shenzhen-Hong Kong share-trading link, which will allow investors to trade shares on each other’s markets.

Beijing gave the go-ahead to the long-awaited Shenzhen-Hong Kong stock connect last month.

More importantly, regulators didn’t set a total quota for the new trading link, which is likely to begin operation in four months.

The previous investment quota for the Shanghai-Hong Kong connect scheme was also removed.

“The removal of the quota will be of huge significance,” said Wendy Liu, head of China equity research with Nomura. “It means that foreign investors’ demand for A shares can technically be met no matter how strong their appetite appears to be.”

China’s A-share market has been swinging in a narrow range in the past months amid low buying interest.

An increasing amount of funds have flowed to H shares recently via the Shanghai-Hong Kong stock link mechanism as investors hunted for bargains offshore. H shares of mainland-Hong Kong dual-listed companies are now trading at a more than 20 per cent discount to their A-share counterparts.

The stock connect programmes are regarded as an important step for Beijing to internationalise the country’s stock market.

For the past two years mainland regulators have been making policy changes to facilitate foreign institution allocation of assets to mainland equities in a bid to convince index provider MSCI to include A shares in its emerging markets benchmarks.

MSCI decided not to include A shares in the benchmark in June, but analysts said it wouldn’t stop Beijing from taking further action to achieve the goal.

“As the A-share market stabilises, the government will still pursue a further opening of the market to the world,” said Haitong Securities analyst Zhang Qi. “The trend is irreversible but regulators need to show their resolve.”