Three major financial centers in Europe have it. Four major financial centers in Asia also have it. But the U.S. is yet to be awarded a quota that will allow money managers to market and invest offshore in the China securities markets.
In the past few years, China's domestic equities and fixed-income markets have opened up to international investors through measured programs that allow the market regulators to stay in control, but at the same time attract foreign capital.
The most recent expansion of the renminbi qualified foreign institutional investor program, known as RQFII, came last month when Frankfurt was granted an 80 billion RMB ($12.9 billion) quota. Shanghai-based Z-Ben Advisors, a strategic consultant to financial firms and investors looking to do business in China, thinks Sydney may be next, with a potential quota by November.
According to a bulletin published by the Shenzhen Stock Exchange, July 21, China had granted a total 250 billion RMB of RQFII quotas across 84 institutions in Hong Kong, the U.K., South Korea, Singapore, Germany and France.
However, the U.S. has not yet been allocated a quota.
One source familiar with the program said it could be down to some regulatory rules not matching up between the two countries. Paul Moloney, Hong Kong-based partner and head of the Hong Kong representative office at law firm Dillon Eustace Solicitors, said London, Paris and Frankfurt's governments have made a “concerted effort...to obtain RQFII quota(s), which has been supported at the highest levels by those governments. To date there has been no public indication that the U.S. and China are discussing extending RQFII to the U.S.,” he said.
Another source said it might also be the case that U.S.-based money managers have not seen the demand from their clients to invest in the market offshore, preferring to invest via exchange-traded funds and other index exposure.
Andy Seamen, London-based fund manager and partner at Stratton Street Capital LLP — which already has a renminbi bond fund but is also planning to offer international investors access to the domestic bond market in China, suggested it might be a case of the U.S. being more familiar with settling trade in dollars, rather than using another currency. Stratton Street Capital has $1.5 billion of assets under management.
Whatever the reason, executives are convinced the U.S. will join the quota club. “We can say that, eventually, as more RQFII cities are established abroad, and there is increased demand for RMB in the U.S., and as the Chinese capital markets develop, you are likely to see RQFII quota awarded to New York,” said Jesse Lazarus, Shanghai-based analyst at Z-Ben Advisors. “This especially becomes more likely if some of the major index providers (such as MSCI and FTSE) decide to add A-share exposure to their global indices.”
Launched in November 2011, the program enables approved money managers to directly invest in domestic capital markets in China, including the coveted A-share equity — shares in China-based companies that trade on the local stock exchanges — and onshore bond markets. Beginning with Hong Kong in 2011, quotas have since been awarded to Taipei, Singapore, London and, earlier this year, Paris. Quotas for Seoul and Frankfurt were announced last month.
“One of the main goals of RQFII is to promote the globalization of the renminbi,” said Mr. Lazarus. “That may be a motivator (for choosing) a city like London, which is an international financial center.”
He said London's reputation as playing a “major role” in the developing of the offshore U.S. dollar market, and in globalizing the dollar, might be a factor. “Perhaps in a similar fashion, the Chinese authorities are hoping London can help speed up the globalization of RMB.”