U.S. remains on sidelines as RQFII expands

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.”

While the U.S. might be slightly behind in the RQFII game, all money managers have spotted the opportunity the program offers. And that includes their subsidiaries in the relevant cities. Money management giant BlackRock Inc. was granted a license and a 2 billion RMB quota for RQFII through its Asia-based subsidiary, BlackRock Asset Management North Asia Ltd., and London-based BlackRock Advisors (U.K.) Ltd obtained a license in June. It now will apply for investment quotas under the program.

But few global money managers have leapt on board and gained licenses to manage funds direct from their own home base.

“The cities in Europe have taken a while to get their feet off the ground, but in the meantime we have seen some of the Chinese RQFIIs in Hong Kong linking up with foreign partners — Deutsche Bank and Harvest Global Investors, CSOP and Source, Van Eck and China AMC, Bosera and KraneShares — they are already offering passive equity (exchange-traded funds) products in Europe and the U.S.,” said Mr. Lazarus, referring to Source U.K. Services Ltd., CSOP Asset Management Ltd., China Asset Management (Hong Kong) Ltd., Van Eck Securities Corp., KraneShares, Bosera Asset Management (International) Co., Ltd.

Mr. Lazarus said Z-Ben has identified two Germany-based and two France-based money managers it believes are likely to apply for licenses and gain quotas. “For Frankfurt, Allianz is a likely candidate — it already has ownership in a mainland (China) joint venture mutual fund company, and is quite active in the Greater China space. Deutsche Bank is also quite active, and has ownership in one of the leading mainland joint venture mutual fund companies — Harvest.”

A spokesman for AllianzGI provided an e-mailed statement on the potential for an RQFII program: “AllianzGI invests in Chinese A-shares and RMB-denominated bonds through the existing QFII program, with strategies managed by our investment teams based in Hong Kong. In the medium term, we may look to make use of an additional RQFII quota in order to extend our investments in these securities.”

A spokesman for Deutsche Bank AG declined to comment, but Mr. Lazarus said the firm's partnership with Harvest had garnered Hong Kong RQFII products in the U.S. and Europe.

In Paris, BNP Paribas and Amundi were identified as potential RQFII candidates.

T. F. Cheng, Hong Kong-based head of sales for Asia Pacific at BNP Paribas Investment Partners Global, said in an e-mailed comment that the firm has applied for licenses in Hong Kong and in Paris. “BNP Paribas Investment Partners in Paris would like to leverage on this opportunity to consolidate its positioning as the first French player in the RQFII space,” he said.

A spokeswoman for Amundi Asset Management did not respond to requests for comment.

Besides BlackRock, London has seen further RQFII success. Ashmore Group obtained the first non-Hong Kong RQFII license from the Chinese regulators in January. The $75 billion manager was granted a 3 billion RMB quota, but is yet to bring funds to the market.

“We are in the process of launching some funds,” said Christoph Hofmann, global head of distribution at Ashmore in London.

For the emerging markets specialist, the rationale was straightforward. “China is the second-largest economy in the world, the largest emerging market by (gross domestic product), and one of the markets that we would like to invest in more flexibly,” Mr. Hofmann said.

Mr. Hofmann said the firm had a Qualified Foreign Institutional Investor license, a U.S. dollar-denominated program that is much stricter than RQFII. Mr. Hofmann said QFII allowed it to invest onshore in equities and fixed income, but restrictions on the program such as inflexible asset allocation rules and a lockup period on investments meant RQFII was necessary. “When we heard that the scheme was extended to cities in Europe, and London, we applied straight away.”

Mr. Hofmann declined to comment on the nature of Ashmore's new RQFII funds, but a source with knowledge of the situation said he understood the manager was set to launch three fixed-income funds.