On December 16th, the China Securities Regulatory Commission (CSRC), the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) together issued the rules for the RQFII (RMB Qualified Foreign Institutional Investor) program and officially launched the RQFII programs in Hong Kong to enable qualified Hong Kong subsidiaries of fund management companies and securities firms to use their RMB funds raised in Hong Kong to invest in mainland securities.
Maintain stability and control risk
According to the rules, the maximum investment quota of RQFII programs is set at about 20 billion RMB, and at least 80 percent of RMB must be invest in fixed-income securities, while no more than 20 percent can be used for investment in stocks and equity funds. These restrictions on investment quota and portfolio reflect regulators’ concern with the adverse effect caused by excessive investment and their priority to keep the mainland financial market stable and to control risk.
As of April 2011, 16 securities firms and 9 fund management companies had Hong Kong subsidiaries which will be considered ‘qualified’ and included in the RQFII approvals in the future. Up to December 23rd, 9 fund management companies first gained the RQFII approves from CSRC, with their RQFII products launching next February at the soonest.
Impact of the RQFII Program
Compared with the total market capitalization of China’s A Share market and the rules that restrict the amount that can be invested in equities, the initial implementation of the program will likely have little near-term impact on the market. However, the latest statement from Guo Shuqing, the new chairman of the CSRC, clearly indicates that the CSRC is committed to encouraging long-term capital to flow into the stock market. The RQFII programs are another important part of this strategy as they will open another significant channel for overseas RMB funds to flow back into the mainland capital market.
The program will likely have a greater impact on HK markets as overseas RMB funds have to date had limited investment choices. Because of this, there will be quite a bit of demand for the RQFII program and likely the first batch of RQFII products will not meet investors’ demands. The 20 billion RMB investment quota will be increased in the future and the influx of capital through the RQFII will inevitably benefit to Chinese Stock in a long term.
As one of ways in which China make its currency to more international, the RQFII programs, by giving a green light to investment of overseas RMB funds in mainland securities markets, will not only make Chinese capital market more open but also facilitate off-shore RMB business by diversifying investment products for overseas RMB funds.
At first, regulators will tightly control the program as to ensure it does not expand too quickly, however, the authorities will continue to widen the investment channel of overseas RMB funds and making the RMB an international currency slowly will not change.