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Chinese QFII success won’t hinge on reforms

Chinese QFII success won’t hinge on reforms

While China’s efforts to ease rules for qualified foreign institutional investors (QFII) is a welcome step, the move is not good enough to access the full potential of the Chinese capital market, says Brock Silvers, managing director of Kaiyuan Capital.

Last week, the People’s Bank of China and the State Administration of Foreign Exchange released a circular outlining policy measures that could lead to easier flow of capital for the approved QFII investors.

The reforms include the lifting of the 20%-of-domestic-assets monthly cap on the remittance of funds by overseas investors, as well as the removal of the three-month lock-up periods for investments.

In addition, China is now allowing foreign investors to carry out foreign currency hedging, thus hedging the exchange rate risk of domestic investments.

Silvers said while a liberalized QFII regime may gather more momentum, the ultimate success or even survival of the program won’t hinge on such reforms.

He said the market is much more concerned with the stock connect schemes launched by China in recent years.

Introduced in 2002, the QFII scheme allows fund managers to make investments into China A-shares listed on Shanghai and Shenzhen stock exchanges within an approved investment quota.

As of May, there were 287 approved foreign investors under the channel with a total approved investment quota of $99.4 billion.

However, the Shanghai and Shenzhen stock connects, launched in 2014 and 2016, respectively, are being viewed as more friendly to foreign investors.

For example, only those institutional investors that qualify under the China Securities Regulatory Commission requirements are eligible under the QFII scheme, while the stock connects are open to all Hong Kong and overseas investors.

Moreover, the stock connects don’t have lock-up periods or quota allocation requirements limited to certain investors.

As a result, they have proved to be popular vehicles for overseas investors to enter the Chinese capital markets.

In May, Hong Kong and China increased the daily quotas under the two stock connect schemes ahead of MSCI’s inclusion of over 230 large-cap Chinese stocks into its emerging markets index.

The new daily quota for each of the northbound trading links is RMB 52 billion ($8 billion) and the new daily quota for each of the southbound trading links is RMB 42 billion ($6.5 billion).

'In terms of China's securities reforms, QFII is almost “history” after the Stock Connect Scheme stepped in, which is more controllable, convenient to investors,' Frank Lee, senior investment strategist at DBS Wealth Management told Citywire Asia.

He said that while the importance of the QFII scheme is minimal, it is a good way for overseas investors to test the waters.

In fact, QFII is being viewed by some market participants as an interim measure for China to open up its capital markets that could be replaced by the connect schemes.

According to Silvers, QFII is a ‘semi-reform’ towards making China a well-integrated international market and the Asian giant will eventually have to allow fuller integration of Chinese capital into global investment flows.

‘Five years from now, I assume that QFII will no longer be necessary,’ he concluded.

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