Two decades ago foreign investors had little, if any, access to China’s growing capital markets. Today, institutional investors have an array of access channels to choose from, and the new challenge for them is to select the scheme that best suits their investment needs.
Comparing the myriad of foreign investor schemes offered in mainland China can be daunting. Investors must consider their short- and long-term goals when devising their China investment strategy, weighing their risk appetite and what they want to achieve. They may find one scheme that meets all their needs, or they may combine different forms of access.
China now offers five schemes that enable foreign investors to invest and trade in onshore securities: Renminbi Qualified Foreign Institutional Investor (RQFII), Qualified Foreign Institutional Investor (QFII), Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, Bond Connect, and the China Interbank Bond Market (CIBM) Direct Access Scheme. A sixth scheme, the Exchange-Traded Funds Connect (ETF Connect) is expected to launch later this year. Each investment channel has advantages and limitations.
A History of Development
RQFII was introduced in December 2011 as an expansion of the existing QFII scheme. While QFII quota-holders have to convert foreign currency into RMB to invest in Chinese securities, RQFII quota-holders can invest into China’s domestic markets with offshore RMB. The People’s Bank of China (PBOC) has evolved RQFII over its lifetime in terms of market accessibility, regulatory reforms and capital mobility to enable foreign institutional investors to apply for RQFII quota and licenses in a measured and controllable manner.
The introduction of the Shanghai-Hong Kong Stock Connect in 2014 and the Shenzhen-Hong Kong Stock Connect in 2016 allowed foreign retail investors, for the first time, to access Chinese stocks via the Stock Exchange of Hong Kong Limited (HKEX).
Further dramatic changes came in 2016 and 2017, when the CIBM Direct Access Scheme and the Bond Connect were opened allowing foreign investors to access the CIBM directly and via Hong Kong.
Weighing the Options
The trend has been for each new direct investment scheme to offer greater and easier market access, but there are still distinct benefits and disadvantages to each one. Choosing the right scheme depends on what kind of investor you are and your strategy with respect to Chinese assets.
The RQFII scheme allows investments directly in both equities and bonds during Mainland Chinese trading hours. RQFII holders are only subject to their individual quota granted by the Chinese regulators. Firms holding RQFII quota can structure products to invest in securities that are not permitted in the Connect schemes, and also to launch RMB-based products to capture the fast growing offshore RMB pool held by international investors.
The Stock Connect schemes enable foreign investors to access certain eligible A-shares on the Chinese equity market when both the Hong Kong and China markets are open for trading. They can be used without any long-term commitment and little planning or set up. However, all Stock Connect investors share a daily overall trading limit and may buy only those Eligible Stock Connect PRC A-shares. The Stock Connect schemes also include “indirect” investment schemes, which only enable access through the Hong Kong Securities Clearing Company Limited (HKSCC) as the investor’s nominee to hold those securities.
If an investor’s interest is solely in trading bonds and not equities, they can choose between the CIMB Direct Access Scheme and Bond Connect.
There are many potential configurations between the various schemes. For example, with the rise in ETFs and the impending launch of the ETF Connect later in 2018, asset managers could be an RQFII holder, launch an ETF fund that utilizes its RQFII quota, list that ETF on HKEX and then access Chinese and Hong Kong investors through the ETF Connect.
Evolving Access
RQFII The industry’s general expectation is that there will be further relaxation in rules for both the RQFII and QFII schemes to bring the two schemes into alignment. Industry participants also hope for a consolidation of at least some of the PRC direct investment schemes, although this appears unlikely. Given the fact that some of the PRC direct investment schemes were launched well before the other schemes, switching from one scheme to another to consolidate requires the liquidation of a portfolio before reinvesting the funds in another scheme, because direct transfer is not possible.
With the Shanghai-London Stock Connect expected to roll out later this year, the existing Stock Connect and Bond Connect schemes seem to be firmly entrenched while new sweeteners for the RQFII and QFII schemes indicate that the PRC regulators continue to have faith in them.
The range of China market access schemes for foreign investors creates opportunities for all investors. The challenge is choosing the right scheme for you and remaining informed of the steady evolution of the schemes to ensure you are always utilizing the best scheme for your needs.
For more information, please visit www.bnymellon.com/rqfii.
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Roy Chew
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