Political motives drive RQFII deviation from debt

China’s stock market regulator will expand the renminbi qualified foreign institutional investor programme to include more participants with a renewed focus on equities.

  • 27 Feb 2013
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The China Securities and Reforms Commission (CSRC) will soon expand the renminbi qualified institutional investor (RQFII) programme to give more types of institutions greater access to the onshore securities market, and give licence holders greater scope to invest in equities as well as debt.

While the move is poised to benefit offshore investors, who are starved for access to China’s securities market, it also suits the CSRC’s own aims to stabilise its stock market and better compete with the activity seen in the central bank-regulated interbank bond market.

“The CSRC has been strategising to get more international investors involved with its stock market in particular given onshore equities’ performance,” said Francis Cheung, head of China-Hong Kong strategy at CLSA, noting the regulator has done a lot to open the onshore securities market up to foreign investors in the last year. “The question for them is how far and how much they do it this year, and then how to manage fund flows and encourage the types of investors they want in the market.”

The RQFII programme has traditionally been a vehicle for the Hong Kong-based arms of Chinese asset managers to invest in Mainland bonds and equities, at a ratio of 80% to 20%, respectively. But on Sunday (February 24), state-owned media agency Xinhua reported that the CSRC confirmed the completion of its revision rules to expand the pilot scheme, and it will soon announce its ruling that changes this arrangement.

The expectation is that the CSRC will allow more institutions to participate in the programme, rather than just funds and securities firms. And the regulator will eliminate the required 80:20 ratio of bonds-to-equities.

There is also talk of expanding the programme to include Taiwan-based institutional investors.

The news follows other liberalising moves by the CSRC to include more foreign investor participation. On November 11, the regulator announced a Rmb200 billion (US$32.1 billion) increase to the quota from Rmb70 billion.

Two months later, chairman of the CSRC Guo Shuqing told an audience in Hong Kong that both RQFII and qualified foreign institutional investor (QFII) quotas could expand to 10 times their current levels.

Political play

While the CSRC’s decision to expand the RQFII programme will appease foreign investors seeking greater China exposure, allowing more institutional investors to buy onshore stocks should help the stock market mature.

“The government has been very aggressive in approving investment quotas to foreigners to invest in the A-share market. Right now foreigners have about 1% [of domestic equities] market cap but it could expand to 10%,” said Cheung.

This will be especially important as 80% of the equity market’s investors are retail investors, who tend to have more shorter-term approach to investing contributing to the market’s volatility. “More institutional investors will give the market more stability because retail investors tend to have a short-term view on shares, and foreign institutional investors have additional understanding of the due diligence process which will be a positive factor in the market,” added Cheung.

Yet, while the CSRC is politically motivated to expand foreign participation into its stock market, it is also looking for greater activity to rival trading in the interbank bond market, which is regulated by the People’s Bank of China (PBoC).

Approximately 95% of bonds are issued into the interbank market, with participants including state-owned companies, banks and commercial paper and medium-term note issuers. By contrast, the stock-exchange market is available to listed companies, such as small-to-medium-sized enterprises (SMEs).

As the stock exchange isn’t able to compete with the breadth of the interbank market in terms of bond issuance and activity for the time being, the CSRC is looking to promote its equities market to entice foreigners to generate activity.

“Basically this news reflects the competition amongst the regulators,” explains one China credit analyst. “The PBoC manages the largest and most liquid bond market in China and the CSRC has a bond market, too, but the investor and issuer base is much smaller...Some RQFII licence holders have access to both markets, and while some of these investors will move to the CSRC’s market, the interbank market is so well-established and appealing.

Giving foreign funds a greater equities offer may incentivise them to stay in the stock exchange market.

Foreigners may also appreciate the ease of conducting business in the stock-exchange market. Right now, bonds issued into the interbank and stock-exchange markets must submit different paperwork, meet different requirements and receive ratings from different agency groups than the other.

For example, Moody’s onshore joint venture (JV) ratings agency China Chengxin, separates its duties between China Chengxin International Credit Rating, which issues ratings for bonds trading in the interbank market, and China Chengxin Securities Ratings, for the stock-exchange market. The JVs and partnerships with the other two global ratings agencies operate the same.

“When there are issues in the markets, their ratings are assigned by different ratings agencies because both regulators have their own qualifications,” said the credit analyst.

The CSRC is hoping its own system will be just enough for RQFII holders to get their heads around.

“The CSRC is hoping that it can attract more investors, and giving foreigners greater access to different parts of the market helps,” concluded the analyst. “The CSRC is trying to catch up with the development of the bigger bond market, and they are trying to get a larger market share.”

  • 27 Feb 2013

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