New Chinese policy may favor big foreign investors

Regulators guarding China's local stock market are putting out the welcome mat for big foreign institutional investors, amid signs that a growing number of those investors could move to take advantage of the open door.

On Dec. 14, China's State Administration of Foreign Exchange scrapped a $1 billion ceiling on investments in local capital markets by “institutional investors such as sovereign wealth funds, central banks and monetary authorities,” according to an announcement on the SAFE's website.

Money managers and institutional sales executives in the region said it is their understanding the lifting of the quota ceiling will extend to other bulge-bracket investors, such as the $36 billion Bill & Melinda Gates Foundation, with a $300 million QFII quota, as well as large pension and endowment funds.

Representatives from the SAFE and the China Securities Regulatory Commission — keeper of the “qualified foreign institutional investor” system launched a decade ago to cautiously open local capital markets — couldn't immediately be reached for comment.

The lifting of the QFII quota ceiling is just the latest in a spate of moves this year easing barriers to entry for overseas investors.

Among other changes, the minimum assets under management needed by a money manager to apply for a QFII license was cut to $500 million from $5 billion, while the minimum track record required was dropped to two years from five years. Amid continued streamlining, the time required to get a QFII license from the CSRC has fallen to six months or less from well over a year, while the time required to subsequently get a specific quota from the SAFE has narrowed to one or two months from six.

If liberalization has been widespread, there has been a clear tilt in favor of foreign investors deemed to be heavyweight sources of patient capital, market participants say.

There's been a quantum leap this year in the efforts of China's regulators to attract big institutional investors, including sovereign wealth funds, central banks and pension funds, noted Charles Salvador, vice president of QFII, equity-global institutional sales, with Bank of China International in Shanghai.

Almost 70 QFII licenses have been issued in 2012, compared with 135 in the first nine years of the program. A $1 billion quota for sovereign wealth fund Qatar Holding LLC is among the more recent allotments, Mr. Salvador said.

The lifting of quota ceilings for large foreign pension funds, sovereign wealth funds, central banks and insurance companies is making QFII a two-tiered program, with a growing focus on asset owners as sources of “sticky assets,” as opposed to money management firms or investment banks, said Francois Guilloux, director, regional sales, with Z-Ben Advisors Co. Ltd., a Shanghai-based consultant.

Money management veterans in the region say that regulatory tilt reflects a belief that foreign institutions, focused on long-term returns, can add ballast to a local market that remains dominated by momentum players.

Regulators seem intent on providing further access to investors such as SWFs and central banks, which have remained consistently invested through market cycles, while keeping shorter-term investors, such as investment banks and hedge funds, at manageable levels, noted one local asset management executive, who declined to be named.

Some observers note that the ranks of big foreign investors among China's QFII license holders are still relatively thin, and dominated by Asian players. These would include Singapore's Government Investment Corp. Pte. Ltd.; Temasek Fullerton Alpha Investments Pte., an investment vehicle of Temasek Holdings, the Singapore government's investment arm for the Asian region; and the Hong Kong Monetary Authority, with quotas of $1 billion each.

Other large regional investors include central banks such as Bank Negara Malaysia, with a quota of $400 million, and the Bank of Thailand and the Bank of Korea, with $300 million each.

Big investors outside of Asia include Norges Bank, with a $1 billion quota, and the Abu Dhabi Investment Authority, with $500 million.

A number of sophisticated foreign investors — including the endowments for Harvard, Yale, Stanford, Princeton and Columbia universities — have smaller quotas of between $50 million and $200 million.

If the ranks of institutional investors among QFII license holders are dwarfed by the combined number of money management firms and investment banks, Mr. Guilloux predicts regulatory moves favoring asset owners are likely to be met by growing demand on the part of those foreign investors.

Doubling their weight

In an August report on the changing QFII landscape, Z-Ben predicted asset owners would hold 33% of QFII licenses by the end of 2015, roughly doubling their weight since the end of 2006, while the portion held by sell-side institutions will drop to 18% from 51%. Asset management firms should climb to 49% from 33% over the same span.

The report predicted moves to provide foreign asset owners easier access to Chinese capital markets will force big investment banks — which have profited from “renting” their quotas to institutional clients while quotas remained hard to come by — to revise their business models for the Chinese market.

The days when a 1% allocation to China's markets would be sufficient for a big global portfolio are fast coming to an end, especially as the just-eliminated $1 billion ceiling was a combined total for local Chinese equities and bonds, Mr. Guilloux said.

Last April, the securities regulating commission lifted the ceiling for QFII program assets to $80 billion from $30 billion, and by year end, total QFII-related investments will stand at around $36 billion, Mr. Guilloux said.

Z-Ben Advisors expects that $80 billion limit to be invested within two years.

In the next year or so, the CSRC is likely to continue issuing new licenses at a growing clip, and that should prove an attractive environment for foreign and local money managers alike, Mr. Guilloux said.

Garry Hawker, a partner with Mercer (Singapore) Pte. Ltd., noted a pickup in the ranks of “really big investors ... looking at specific country mandates.”

“We are seeing increased demand from large institutional investors who have got their QFII quota ... looking for assistance in identifying managers for the investment of that quota,” Mr. Hawker said.

Some money managers say they're already benefiting from that trend.

Wong Kok Hoi, founder and chief investment officer of Singapore-based pan-Asian equity boutique APS Asset Management, said his firm — with roughly US$2 billion in assets under management at midyear — will have garnered about US$800 million in additional QFII-related mandates by March or April. Mubin Sadikot, senior vice president, sales and marketing at APS, declined to identify the new clients, but said they are large pension plans in Canada, Switzerland and Korea, as well as some large institutional investors in the U.S.

This article originally appeared in the December 24, 2012 print issue as, "China's new policy may favor big foreign investors".