In the short history of its capital markets liberalisation, China has been known to announce reforms without appropriately following through. The much-heralded Renminbi Qualified Foreign Intuitional Investor (RQFII) programme has proved a leading example of this ad-hoc approach to liberalisation.
The details are few. In December 2011, China announced it would allow Hong Kong subsidiaries of Chinese commercial banks, insurance companies and financial institutions to apply for an RQFII quota, which would allow them to invest onshore. Much excitement followed, but in the end the total quota was set at Rmb20 billion (US$3.26 billion).
Furthermore 80% of the capital had to go into bond investments, and when four identical RQFII-based investment funds were eventually launched in Hong Kong, the take up was less than enthusiastic. In March, the quota was expanded to Rmb270 billion, the 80% cap was removed and regulators said that international organisations in Hong Kong could apply for licences.
But as yet, none has been approved, despite a widely held belief that Hong Kong-based global asset managers would be buying bonds onshore by the end of April.
Admittedly they can invest through the QFII route, but this limits offshore bond-buyers to the Shanghai and Shenzhen stock exchanges, where only around 1% of the total bond liquidity is housed. The other 99% is traded through China’s interbank market, which is off limits to foreigners without a RQFII licence.
The silence and the speculation was broken at the end of last week – not by the news that Hong Kong applications had been approved – but that the China Securities Regulatory Commission (CSRC) would extend the RQFII programme to investors in Singapore and London as well as other unnamed locations.
The danger is that this is another headline grabbing move from Beijing, which is keen to nurture trade relationships with both London and Singapore.
London is not a natural home for the RQFII programme, which is still in its infancy. While the British capital is the headquarters for many of the world’s largest asset managers, the view on China from outside of Asia is pretty bearish.
China’s onshore bond market is a minefield for offshore investors, due to a lack of transparency and a tendency among policymakers to spring new measures on the market. In addition, the currency is unlikely to appreciate in the medium term, as a weaker RMB will help China’s economic recovery.
The spread between offshore and onshore bonds has tightened to less than 100 basis points (bp) and as the capital account is liberalised and price convergence continues, dim sum bonds will look increasingly attractive from the other side of the globe – particularly when adjusted for hassle and risk factors.
Singapore story
The story in Singapore is somewhat different. Fund managers there are much more Asia focused – and therefore China focused.
Singapore is fast overtaking Switzerland as the world’s number one wealth management centre (according to PwC) and is awash with cash. High-net-worth-individuals in the city state are fully versed in the potential for returns onshore – as many Chinese hold their wealth there - and there is already a strong demand for RMB products.
As well as a being a top wealth management centre, the city state is famed as the centre of bond funds in Asia. Some of the first RMB-dedicated bond funds were launched in Singapore – Barclays and UOB Asset Management both set-up bond funds for retail investors at the beginning of 2011. Similar funds only gained popularity in Hong Kong after the RQFII programme was launched at the end of the year.
An RQFII quota would be no small luxury for those investors who are becoming increasingly frustrated with the limitations of the QFII programme and the low returns on dim sum bonds. Many say they are willing to put in the groundwork in return for onshore access.
Some commentators fear that a dilution of the RQFII programme across jurisdictions could threaten Hong Kong’s status as the centre of offshore renminbi investment. In order to prevent this, Hong Kong must take measures to increase competitiveness, but China should also expand the total size of the programme.
This would allow regulators to focus on developing Singapore as a separate and complimentary bond investment centre, which would make the market more liquid and encourage further investor interest – perhaps eventually from places such as London.
If competition between Hong Kong and Singapore is gently encouraged and participation grows, investor fears about the dangers of the Chinese market will be allayed as the path onshore becomes better trodden.
The CSRC has made it clear that it would welcome greater foreign participation in the onshore bond market in order to diversify the investor base, promote the concept of value investment and allow the capital markets to grow in line with international standards.
However, if Beijing is serious about attracting international buyers, it will need to open up the RQFII programme beyond the offshore subsidiaries of China names.
Many international companies who were hoping to receive RQFII quotas earlier this year already have QFII access and are familiar to onshore regulators, so there is little excuse for the extended delay in approvals.
China should use this opportunity to finally approve the Hong Kong quotas and demonstrate to investors in Singapore that it is willing to take them seriously. Asia’s largest economy has already lost the interest of many global investors and would be foolish to mess around with the affections of those closer to home.