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China may cut inbound investment quota on lower demand

Tuesday, April 12, 2016 - 18:32

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[HONG KONG] China's foreign exchange regulator may cut investor quotas under its Qualified Foreign Institutional Investor (QFII) scheme if an investor does not use up 60-70 per cent of the allotment within a year after it is approved, two sources close to the matter told Reuters on Tuesday.

The State Administration of Foreign Exchange (SAFE) is also in the progress of reviewing and verifying the quotas of all existing QFIIs and the clean-up is expected to be completed by June, the sources said.

China launched the QFII scheme in 2002 and the total quota was expanded to US$150 billion last year. But investor appetite for Chinese assets has diminished amid a slowdown in the world's second-largest economy and as the yuan depreciated sharply. It fell 4.5 per cent against the dollar in 2015.

As of March, the outstanding amount of QFII was at US$80.95 billion, only slightly higher than US$80.8 billion a month earlier and about 12 per cent higher than a year ago, according to SAFE statistics.

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Global banks have started to hand back investment quotas used to buy Chinese stocks and bonds as alternative channels for investment in China and the sliding yuan are making this once lucrative business unprofitable.

Asset managers have access to China through QFII or new alternative avenues for investments such as the Shanghai-Hong Kong Stock Connect scheme and the more flexible yuan-denominated RQFII - so fewer need the banks as go-between.

The People's Bank of China (PBOC), the SAFE and the China Securities Regulatory Commission (CSRC) held joint training during April 9-10 to clarify various schemes through which foreign investors can buy Chinese securities, according to market sources.

Regulators will further reform the QFII and Renminbi QFII (RQFII) schemes, but the two will not be merged into one as RQFII is a crucial scheme to promote the yuan's internationalisation, they said.

"China's inbound investment programmes are moving toward a shared open architecture...QFII is about to become better aligned with RQFII and it is clear to us that both programmes will now be moving forward in tow," said Z-Ben Advisors.

The PBOC announced it would open its interbank bond market in February and said it would scrap quotas for long-term investors such as pension funds and charity funds.

Sources said investors can only choose one channel to enter the interbank bond market, either via QFII/RQFII or by filing directly to the PBOC and the implementation details will be released within a month.

When contacted by Reuters, SAFE did not immediately respond to a request for comment.

REUTERS

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