Easier rules to help more investors diversify portfolios and hedge risks

Relaxation of China's inbound investment scheme last year has offered foreign investors an unparalleled access to a wide range of onshore financial assets, triggering an "immediate" surge in new applications for market entry, experts said.

From Nov 1, the day the new investment regulation for qualified foreign institutional investor and renminbi qualified foreign institutional investor schemes took effect, to Dec 22, China received 62 applications from overseas institutions to become QFIIs, according to the China Securities Regulatory Commission's website.

In the January-October 2020 period, there were only 31 QFII and RQFII qualification applications.

Market insiders attributed the surge in applications to the revision that has relaxed qualification requirements, streamlined review process, and broadened investment scope of the regime.

"We definitely see immediate impact," said Thomas Fang, head of China global markets and QFII representative with UBS, a multinational investment bank.

The market is reacting "very positively" to the revision, as it has strengthened the advantage of the QFII scheme in giving access to the most comprehensive set of onshore assets, compared with other inbound investment schemes like the stock connect that provide access to only one category of assets, Fang said.

UBS has made over a hundred calls with its global clients to help them understand and take advantage of the new rules, he said.

The new regulation has granted QFIIs the access to securities lending, margin trading, short selling, and bond repurchase, the CSRC said.

Also, the QFII investment scope will gradually expand from mainly exchange-listed securities and funds to a much wider range that covers private investment funds, financial and commodity futures, options, and securities admitted on the National Equities Exchange and Quotations system. The NEEQ is an equity trading platform serving small and medium-sized enterprises.

Different stakeholders are rolling out detailed rules and arrangements to implement the relaxations. Some are now in place, like the access to securities lending, margin trading and short selling, while others like stock options and bond repurchase still await detailed implementation rules.

The detailed rules now in the pipeline should come out soon. UBS is working closely with the regulator and others concerned on drafting those rules, said Fang.

"It (the enlarged investment scope) has really expanded the interest of international players," said Sherry Madera, chief industry and government affairs officer with Refinitiv, a global financial data and analytics provider.

The expansion of investment scope has given international investors a real opportunity to have a diversified portfolio in China and more channels to hedge risks, Madera said.

The access to commodity futures particularly resonates with foreign investors who want to understand the plans of the world's second-largest economy to boost productivity, she said.

The new regulation also combined QFII and RQFII schemes, removed quantitative qualification requirements such as the one on the asset scale of foreign investors, and halved the time it takes to review and decide whether to approve the applications to 10 working days.

This came after the People's Bank of China, the central bank, released implementation rules in May to remove the quota limit for QFIIs and RQFIIs, simplify the procedures of repatriating investment income, and allow QFIIs and RQFIIs to choose currencies and the timing of inward remittance on their own.

"International investors are seeing more efficiency and clarity in terms of gaining access to China," Madera said, adding that the QFII changes are expected to trigger a major increase in the number of qualified investors, though it still takes time for the changes to be fully understood.

Besides the rise in applications, the new regulation's impacts include UBS' execution of several securities lending transactions on Nov 2. That is, securities in UBS' QFII account were lent to onshore investors via its onshore joint venture UBS Securities, Fang said. Some of UBS' clients are also keen on stock lending transactions.

At least four other securities firms announced they completed securities lending transactions for their clients on Nov 2, the first trading session after the new regulation took effect.

Looking ahead, the QFII relaxation, in tandem with the importance of the Chinese market, will attract more long-term investors like pension funds and sovereign wealth funds, as well as investors with a shorter investment horizon like hedge funds and quantitative funds, Fang said.

Also, thanks to the widened QFII market access, in a first deal of its kind, an overseas investor bought a mainland-based foreign private fund manager's product in Shanghai, the local financial supervision bureau said in December.

Global investment management firm Barings has subscribed the fund its private fund unit rolled out in China. The deal demonstrated how the QFII relaxation can facilitate the development of foreign private fund managers in China, as they can use money injected from their overseas parent companies to build up funds, the Shanghai Municipal Financial Regulatory Bureau said.