As China continues to internationalise the renminbi, opportunities for international investors to participate in onshore Chinese assets will continue to grow. Regulatory changes are further opening the gateway to a truly 21st century China.
In 2013, the first Renminbi Qualified Foreign Institutional Investor scheme (RQFII) quota outside Greater China was awarded to a UK asset manager. The RQFII regime allows licensed institutional investors to invest renminbi held outside the Chinese mainland into the mainland’s securities market.
In November 2014, the Hong Kong-Shanghai Stock Connect became operational. Stock Connect enables foreign investors to invest in China A-shares listed on the Shanghai Stock Exchange through brokers who are participants in the Stock Exchange of Hong Kong. Unlike RQFII, no individual application needs to be made by investors and no individual quotas apply, although an aggregate quota and a daily quota apply to the whole scheme.
Finally, earlier this month China approved investment by foreign institutional investors in its domestic bond market.
Stock Connect also looks set to expand further to the Shenzhen Stock Exchange in the near future, opening up investment into small cap Chinese companies allowing investors to better diversify across the Chinese market.
The opportunity is huge. Shanghai and Shenzhen have a combined market capitalisation of more than $6trn. Both exchanges have grown rapidly over recent years with Shenzhen almost quadrupling its market cap since 2008. If the use of Chinese A-shares as a constituent part of global indices becomes more widespread then demand will rise all the faster.
Some institutions have experienced difficulties with the interaction between their domestic regulatory requirements and local Chinese rules across QFII, RQFII and Stock Connect. This is understandable when participants enter a market for the first time, but we are optimistic that authorities will find solutions to allow efficient access to these markets without compromising investor protection.
For example, uncertainty over the status of beneficial ownership in Chinese law has concerned international investors, as investments through Stock Connect are held in an omnibus account in the name of the Hong Kong Securities Clearing Company. The requirement for the broker to perform pre-trade checks on securities, which required securities to be delivered to the broker the day before trading, proved problematic for UCITS and Alternative Investment Funds (AIFs), as it required the security to be held outside the UCITS’ or AIF’s normal custody arrangements. The introduction of Special Segregated Accounts has helped resolve this, as brokers can perform pre-trade checks without taking delivery of the security.
The Economic and Financial Dialogues organised by the Chinese and UK governments to identify obstacles to trade and investment and commit to implement measures to address them are very encouraging. We also support the visits and conferences that have been organised by UK Trade and Industry and the Asset Management Association of China (AMAC) bringing firms together to encourage cooperation and offer advice on their respective markets.
Cooperation will see trade in both directions. We have seen growing interest in entering the European market from Chinese firms with two major companies, Nord Engine Asset Management and Harvest Global Investments already having established operations in the UK, as well as a UK-domiciled ETF established by China Construction Bank International.
Further strengthening of ties between our markets represents a great opportunity for both asset managers and investors alike.
China represents a great potential opportunity as it opens up to foreign investors. Problems remain in aligning regulatory regimes but cooperation between nations is helping.
Jonathan Gee is policy adviser at The Investment Association