CSRC extends RQFII to HK banks and insurers
March 15, 2013 | BY
clpstaffChina's top regulator is allowing Hong Kong and foreign financial institutions to tap into the country's capital markets, but it is unclear what threshold the foreign institutions will have to meet to be classified as having a principal place of business in Hong Kong
The China Securities Regulatory Commission (CSRC) released details of the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme in December 2011. At the time, the scheme allowed Hong Kong subsidiaries of fund management and securities companies in the mainland to apply for quotas to use renminbi raised in Hong Kong to invest in the securities market.
This has all changed as the investment scope has been enlarged under the under the Measures for Pilot Projects for Securities Investment in China by Renminbi Qualified Foreign Institutional Investors (人民币合格境外机构投资者境内证券投资试点办法) and the Provisions for the Implementation of the «Measures for Pilot Projects for Securities Investment in China by Renminbi Qualified Foreign Institutional Investors» (关于实施《人民币合格境外机构投资者境内证券投资试点办法》的规定) released on March 1 and effective the same day.
“The latest RQFII measures are a continuation of the QFII rules that the CSRC has relaxed over the past year,” said Hubert Tse, a partner at Boss & Young in Shanghai. “The CSRC is looking to continue to open-up domestic capital markets to foreign long-term institutional investors, as it wants to bring more long-term capital into the market,” he added.
The rules allow for Hong Kong subsidiaries of mainland commercial banks and insurance firms to enter the domestic market, as well as locally-based financial institutions. The CSRC is trying to realise the ultimate goal of internationalising the renminbi and driving funds into the underperforming A-share market.
“There are two main purposes of the regulations. First, the long-term goal of internationalising the renminbi and second, the short-term goal of stimulating the A-share market by drawing additional funds that will stabilise and develop the market,” said Fan Jiannian, a partner with Gide Loyrette Nouel in Shanghai.
Under the new rules, RQFII funds can now invest in mainland initial public offerings, convertible bond sales, interbank bonds, options and share placements. Expanding the investment scope is good news for investors because under the previous rules, investments were limited to stocks and bonds.
But by far the biggest change concerns eligibility. “All the famous Hong Kong financial institutions will in principal be included, but the regulations are unclear over foreign institutions and how they can qualify with their principal business operation in Hong Kong,” said Fan.
The CSRC is expected to issue further details over eligibility soon. However, it is clear that the Commission is committed to welcoming greater participation in the A-share market from other players.
“The rules are not clear on exactly what type of entities outside of the Hong Kong subsidiaries of PRC financial institutions are qualified to apply for RQFII, but it appears that those same institutional investors that are qualified under the QFII scheme may qualify for RQFIIs,” said Tse.
It remains to be seen which foreign financial institutions will be allowed to participate, but the rules do not mean the CSRC is completely releasing its power, as every RQFII is still subject to its approval.
The move will develop Hong Kong as a renminbi financial centre, something Hong Kong and Beijing have been pushing for a long time.
The rules also lift restrictions previously in place that 80% of proceeds could be invested in fixed return securities, like bonds and fixed return funds and 20% in the A-share market. This means QFIIs can now invest all their proceeds into China's main market.
“This makes RQFIIs a lot more attractive than previously to foreign investors who are looking to allocate their funds to renminbi investments,” said Tse.
Whether investors will chose to invest all their proceeds in the A-share market remains to be seen. It is thought they will still invest a large percentage in fixed return securities to minimise risk. However, it is interesting that the CSRC has removed the requirement they previously put in place to limit risk.
“It is interesting that the restriction has been lifted and it is a good trend as it is not the CSRC who decides investment thresholds anymore, but market participants,” said Fan.
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