China Eases Rules On Foreign Fund Flows

The biggest story in Asian ETF markets last month once again involved China’s renminbi qualified foreign institutional investor (RQFII) scheme. Policymakers continued to ease restrictions on foreign flows into mainland markets, introducing two major changes that should allow a greater diversity of both managers and products.

Until now, only Hong Kong subsidiaries of mainland fund managers and securities firms have been able to apply for an RQFII quota. But new rules will open the scheme to Hong Kong–based financial institutions, as well as subsidiaries of mainland banks and insurers.

Hong Kong institutions could include subsidiaries of international firms, although it is likely that first non–Chinese companies approved under the scheme will be those with strong historical links to the region. The asset management subsidiaries of banks such as HSBC, Standard Chartered and Hang Seng are regarded as strong front–runners.

Regulators also loosened restrictions on what investments RQFII funds can hold. Previously, RQFII products could only be funds holding a minimum of 80 percent in fixed–income or equity ETFs (the latter having been by far the most successful with investors). Under the new rules, the 80 percent floor on fixed income has been removed, and RQFII holders will now be able to invest in listed derivatives such as index futures, as well as bonds traded in the interbank market. This will give providers much more flexibility to create products that appeal to overseas investors.

Foreign asset managers will welcome the changes. They had feared they might be sidelined as Chinese managers running RQFII products became the preferred option for foreigners looking to access mainland markets. However, mainland firms already running RQFII ETFs will clearly not give up their head start easily.

Notably, China AMC and CSOP cross-listed their CSI 300 and FTSE China A50 ETFs on the Tokyo Stock Exchange at the end of February as Japanese Depository Receipts (JDRs). By reaching out to Japanese retail investors to draw more assets into their funds, the two firms will hope to stake their claim for another increase in their RQFII quota limits to maintain their market–leading position before more competitors arrive.

China’s First Money Market ETF Debuts

In other China–related developments, the country’s first listed money market fund, the Fortune SGAM Xianji Tianyi Money Market ETF, began trading in Shanghai. The launch has been closely watched, with other firms expected to launch similar products—if this type of ETF proves popular with investors looking to earn higher rates of interest on uninvested deposits in brokerage accounts. Both the Shanghai Stock Exchange and many brokerages are temporarily waiving trading fees and commissions to encourage investors to try the new product.

In the new product pipeline, European index provider Stoxx announced that China Universal has licensed its Euro Stoxx 50 Index as a basis for the first mainland–listed ETF to track the European market, pending approval by regulators. Two “cross–border” ETFs—those that invest in indices outside China—were launched last year, tracking Hong Kong–listed stocks, while Guotai is hoping to list a Nasdaq 100 tracker this year.

Separately, Stoxx also announced its first China benchmark, the Stoxx China A50, which will track the 50 largest companies listed in Shanghai and Shenzhen. Aimed at managers looking for a highly tradeable proxy for mainland markets, the index will compete against the FTSE China A50, which has around $10 billion in assets benchmarked against it. MSCI launched a similar index in late 2012 as a slimmed down version of its long–standing 500–stock MSCI China A index.

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