Mini-QFII products will be subject to Hong Kong law
September 04, 2010 | BY
clpstaff &clp articles &Yuan-denominated funds to channel renminbi back onshore
Yuan-denominated funds offered as part of China's new 'mini-QFII' scheme will be regulated by the Securities and Futures Commission (SFC) in Hong Kong and be subject to Hong Kong law.
The mini-QFII scheme has been proposed by the Chinese government to open up new channels of investment for renminbi deposits held offshore. Unlike the qualified institutional investor programme (QFII) which uses US currency to participate in China's capital markets, this new plan will invest renminbi back into China.
According to commentators, the pilot programme will initially be applied to five or six Hong Kong subsidiaries of Chinese fund management companies (FMCs) and securities firms. They will be the first to launch yuan-denominated investment funds that can be subscribed to by retail investors using their offshore renminbi.
The issuers require a Hong Kong presence to set up the funds, making the funds Hong Kong entities that will have to register with the SFC and comply with relevant Hong Kong laws and regulations.
Commentators have speculated that the initial products will be mutual funds and that an arrangement might have already been worked out between the SFC and the China Securities Regulatory Commission (CSRC).
“The yuan fund launch in Hong Kong would provide Hong Kong retail investors with an opportunity to diversify their investment and to gain exposure to Chinese A-shares using their renminbi holdings that are currently sitting as bank deposits,” said Hubert Tse, a Shanghai-based partner at Boss & Young. Tse assisted Shenzhen-based China Southern Fund Management Co in becoming the first Chinese FMC to set up in Hong Kong in 2008.
The quota for the mini-QFII programme will reportedly be capped at Rmb10 billion. “Authorities want to keep it small so as to manage risks that may arise from such an issue and monitor progress before expanding the programme,” said Tse, who is cautious because no official terms have yet been released. “Of course we will need to see the rules before we know what the regulators say, and what the quota and other terms are for the yuan fund launch.”
As the renminbi appreciates, more Chinese FMCs and securities firms set up in Hong Kong, and more offshore retail investors demand Rmb funds or products to put their renminbi holdings in, some observers expect the programme to be expanded beyond its initial quota.
Tse believes the reaction to the mini-QFII scheme will be very positive.
“I expect the yuan fund launch would become very popular with retail investors in Hong Kong as there are expectations on the appreciation of the renminbi in the longer term and they would be able to have exposure to A-shares,” he said. “Currently they can only invest in H-shares and B-shares in Shenzhen and Shanghai to have exposure to listed Chinese companies.”
The key objective of this pilot programme for Chinese authorities is to test the offshore renminbi market and find out what the reaction is, while in the process seeing if the mini-QFII can help internationalise its currency.
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