The lowdown: China investment quotas

The very first official programme allowing foreign fund owners and fund managers, typically long-only investors, to gain entry to China’s capital markets. Launched in 2003, it has evolved over more than a decade both in terms of the scope and flexibility of its investment rules. As at the end of 2015, the State Administration of Foreign Exchange had given quotas to 279 QFII entities worth $81bn, the largest of the inbound investment programmes. In early February 2016, the regulators gave the scheme an additional boost by removing quotas for licensed QFIIs and basing investment limits on overall assets under management.

Launched in 2011, the scheme allows offshore investors, mostly asset managers, to obtain quotas to invest offshore RMB funds back into China’s equity and bond markets. RQFII was originally limited to Hong Kong, where Chinese asset managers set up their first offshore operations, but the programme has radically expanded since to cover 16 jurisdictions across Asia, Europe, the Americas, and the Middle East. A total of 156 RQFIIs had been selected as of December 2015, with total quotas of Rmb444bn ($67bn). 

Click here for GlobalRMB’s complete RQFII database.

On February 24, People’s Bank of China rewrote the investment rulebook for foreign investors by throwing wide open the doors to the massive onshore interbank bond market. The new rules follow a 2010 pilot that granted quota-free access to the CIBM for foreign central banks, sovereign wealth funds and other public sector investors. The reform has now given foreign institutional investors, commercial banks, insurance firms, trusts, and a variety of other “non-speculative” investors a direct path into the CIBM. Institutions are only required to apply with one of the recognized settlement agent banks in China to gain access to the market.

The original outward investment programme targeting the institutional sector. It was launched in 2006 and it failed miserably as, by the time it kicked off, the global financial crisis ensured that those early investors saw their pioneering efforts go unrewarded. As global markets recovered, so did QDII, which started to gain appeal as onshore investors started to seek portfolio diversification.

As of December 2015, 132 institutions had been approved for QDII, including 30 banks, 48 securities and fund firms, 40 insurance firms, and 13 trustee companies, according to CEIC data. A total of $90bn in investment fund quotas had been approved by the State Administration of Foreign Exchange.

However, due to worries about capital outflows, no new quotas have been handed out since March 2015, with the regulators giving window guidance to QDII managers in February 2016 to halt launches of new QDII investment products.

Approved in May 2015 by the State Council, QDII2 will allow individuals with more than Rmb1m of financial assets in select Chinese cities to invest 50% of these assets in overseas stocks, bonds, and real estate. Corporate investors will be granted a quota of $1bn, up from the current limit of $300m under QDII.

On October 23, 2015, a State Council spokesperson told a media briefing that details were still being finalised.

"QDII2 is a nation-level regulation in financial reform and opening up. In accordance with the State Council, the central bank is conducting studies and working on detailed plans," said Lu Lei, head of the research bureau at the People's Bank of China.

As part of the clampdown on capital flight, QDII2 has been put on hold indefinitely, with no formal announcements made as of the scheme’s possible launch date as of February 2016.

A variant of the original QDII, RQDII allows onshore investors to tap overseas securities denominated in offshore RMB (CNH), such as dim sum bonds. Following the September 21, 2015 high level meetings between China's premier Ma Kai and the UK's chancellor George Osborne, the two issued a joint statement hinting that London might be a destination for investors using the new scheme.

"Both sides welcome China’s RMB Qualified Domestic Institutional Investors (RQDII) scheme, which enables additional Chinese investment into the UK. Both sides strongly encouraged Chinese investors to take full advantage of these and future opportunities to access international capital markets through the UK as well as routing investment into UK infrastructure, regeneration projects and real estate."

In January 2015, GlobalRMB reported on one of the early RQDII products, a UBS (China) RQDII fund targeting US high yield credit-linked notes issued in North America. However, market volatility in the foreign exchange and equity market led to Chinese authorities suspending RQDII products in early December 2015.

Available to Shenzhen-based firms, it allows fund management companies and financial institutions to launch onshore investment vehicles targeting overseas investments. The minimum registered capital for foreign invested QDIE managers is $2m and Rmb10bn for domestically funded ones. The minimum size for QDIE funds is Rmb30m. There were no explicit restrictions on the types of investments for QDIE funds as of May 2015.

An investment scheme targeting hedge funds based in Shanghai. A version of the programme also launched in the city of Tianjin, targeting qualified fund management companies. The scheme was launched as a result of market feedback to the original QDII scheme, which excluded a number of overseas asset classes. The minimum registered capital is $2m, and minimum fund size is Rmb100m.

Distribution of new quotas under the scheme were recently halted by the regulators, although the channel remains viable for existing QDLP products and quota holders.

Launched in November 2014, the Stock Connect allows mainland and Chinese investors to buy and sell a select list of stocks available on the two cities’ exchanges. The scheme’s fortunes have gone parallel to those of the underlying markets, with the northbound China trading starting off strong but slowly dying out as the mainland stock markets fell into ever deeper turmoil in the summer of 2015.

Of the original Rmb300bn net trading quota on the northbound channel, only 41% had been used as of March 14, while 51.6% of the southbound trading quota had been used up, according to CEIC data.

Rumoured since the launch of the Stock Connect scheme, there is still little clear information about Bond Connect. HKEX has reiterated that the scheme is being developed, while markets remain sceptical about its technical feasibility. According to HKEX, the scheme will link foreign investors to the CIBM as well as to the exchange-traded bonds listed on the Shanghai and Shenzhen exchanges. No official plan or launch date had been announced as of mid-March 2016. 

Guidelines for the China-Hong Kong Mutual Recognition of Funds (MRF) scheme were approved by the China Securities Regulatory Commission (CSRC) and the Hong Kong Securities and Futures Commission (SFC) in May 2015. The MRF, which allows eligible Hong Kong mutual funds to be sold in the Mainland and vice versa, went live in December 2015. As of February 2016, 25 funds had been approved by the SFC, and six had been approved by the CSRC. The scheme has an overall net buying quota of Rmb300bn each way, with each fund able to sell into the other market up to 50% of the total fund value.

Check out a selection of GlobalRMB’s investment quota stories below:

CIBM access challenges Bond Connect rationale

What's in store for RQFII?

Liberalisation of CIBM sidelines QFII/RQFII schemes, say portfolio managers

China's bond market: The $6tr opportunity?

China capital curbs boost Mutual Recognition scheme

QDLP quotas halted, but scheme still open for business

Asset managers bet big on China’s WFOE structure

PBoC suspends RQDII business to cope with CNH devaluation

Hedge funds and China: a love-hate affair