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Hong Kong says in talks with Beijing to raise RQFII quota

[HONG KONG] Hong Kong is in talks with authorities in Beijing to expand its quota to invest in mainland financial markets as the limit has been reached, the city's financial secretary said on Tuesday.

As a pioneer to promote the yuan's internationalisation, Hong Kong was granted a 270 billion yuan (US$43.51 billion) quota under the Renminbi Foreign Institutional Investor (RQFII) scheme in 2011 to facilitate cross-border foreign investment.

The quota was exhausted late last year and has yet to be increased even though China accelerated the pace to grant RQFII quotas to countries such as Chile, Switzerland, Australia, Canada and Qatar. "We are now in discussion with the central government to expand the scheme's fully-used quota of 270 billion yuan," Hong Kong's Financial Secretary John Tsang told a forum, without elaborating on a timetable or size.

China's yuan has become the world's fifth-largest payment currency, and Hong Kong handles about 70 percent of the business, Tsang said.

A lack of fresh quotas has proven challenging to asset managers in the world's biggest offshore yuan hub.

China CSOP Asset Management, the biggest RQFII player with an aggregate quota of 46.1 billion yuan, had to free up quotas from other products to support its popular ETF that tracks the FTSE China A50 Index while some fund managers were forced to turn down new orders from clients.

The situation was greatly relieved when China launched the landmark stock connect scheme between Shanghai and Hong Kong in November. Fund managers freed some investments from their RQFII quotas as well as channelled new money to the stock link-up.

About 30 per cent of CSOP's FTSE China A50 ETF, or HK$10 billion (US$1.29 billion), is now using the stock connect channel, said Jack Wang, the firm's chief marketing officer in Hong Kong.

Though the stock connect scheme has made it less urgent to have new RQFII quotas, the RQFII channel remains an important one where fund managers do not have to compete with other investors for daily quotas, market players say.

China has granted a total of 870 billion yuan of RQFII quota to 11 countries/regions so far.

The RQFII plan enables foreign investors to use offshore yuan to buy stocks and bonds in mainland China.