Most institutional investors will find accessing A-shares on their own a daunting task with significant logistical hurdles.
“In order to get a license as an institutional investor, you need to be positioned with a China team and you need to be able to state a case that you are prepared to manage A-shares as an asset class,” said Frederick Laydon, chief operating officer Asia.
“As a RQFII license holder, we do have that capacity and in our view it is better to have a team focused on strategy,” Laydon said.
Currently, institutional investors outside of China are able to access A-shares through Qualified Foreign Institutional Investors license, RQFII license or via the recently launched Stock Connect programme.
RQFII Vs QFII
According to Laydon, RQFII license scores over the QFII in terms of greater liquidity, fewer restrictions on repatriation of funds and more flexible investment guidelines.
“The RQFII allows for daily liquidity, which is important to many investors. An important point is, there is no lock-up period for investing in the RQFII market whereas for QFII market, there is a three-months lock-up,” he said.
“With RQFII, there is a greater ability for the license holder to request additional quota once capacity is reached. The RQFII license holder can do that several times in a year whereas QFII managers can only ask for additional quotas once in a year.”
Furthermore, China has recently announced new rules, under which the RQFII quotas would no longer be applied to a specific open-ended fund, but could be transferred to other funds within the same institution.
“The built-in flexibility that this new rule will give an asset manager is another reason for institutional investors to leverage a manager already licensed for RQFII rather than trying to go it alone,” Principal Global said.
RQFII Vs Stock Connect
The Stock Connect programme, which links the Shanghai and the Hong Kong stock exchanges, gives another avenue to investors to trade shares in each other markets.
Even as this potentially increases the total access to China’s equities, there are certain practical aspects that need to be considered which includes no access to Shenzhen, smaller quota and trading considerations.
According to Principal Global, RQFII scores over the Stock Connect too due to its broader set of investment opportunities.
“Certainly for now and the time being, RQFII is the vehicle which allows access to the greatest number of share offerings in the market. You can access both the Shenzhen as well as the Shanghai markets, whereas the Stock Connect only allows for certain shares in Shanghai.”
Currently, the mainland stocks eligible on the Stock Connect include all companies listed on the Shanghai Stock Exchange 180 and 380 indices.
“The biggest reason is the opportunity set available for the portfolio manager to choose which names to buy. With RQFII, we can buy any of the shares in Shanghai and any in Shenzhen. That offers you a much greater opportunity set than a specific list of names in the Stock Connect.”
Laydon expects Stock Connect programme to expand over a period of time, adding Shenzhen listed companies.
“At that time, there would probably only be the larger Shenzhen names added to Stock Connect, and some of the small-cap names might be added only at a later time.”
“But, some of the small-caps names are quite interesting to portfolio managers now. So, certainly for the time being, RQFII is the only way to get an access to a lot of names that would be particularly interesting.”
BlackRock’s Helen Zhu, head of China equities has earlier said that she expects another linkage between Hong Kong and the smaller Shenzhen Stock Exchange, which has a market capitalisation of $1.9trn, to be launched over the next two years.
Other industry concerns
Schroders had earlier highlighted some of the issues in implementation of the Stock Connect, which includes clarity on the exercise of rights issue of shares, differing settlement cycles between Hong Kong and Shanghai and the limitation of daily quotas.
Asia Securities Industry & Financial Markets Association recently highlighted in its white paper that pre-delivery requirements (settlement related differences) and beneficial ownership are the major obstacles that some institutional investors have encountered when investing via Stock Connect.
“The current pre-delivery requirements are definitely a barrier for some institutional investors. Pre-delivery is not part of the customary practice of most portfolio managers, whose processes and procedures simply can’t be changed quickly,” said Mark Austen, chief executive of ASIFMA.
“In terms of beneficial ownership, many global funds and regulators are still not comfortable with the enforcement rights of beneficial owners in China, which means that most long-term institutional investors are not going to be investing in the near term.”
Global asset managers had earlier voiced concerns over tax implications too. Just before the start of the ‘through train’, Chinese authorities announced that foreign investors using the Shanghai-Hong Kong connect to buy yuan-denominated A-shares will be temporarily exempt from capital-gains tax.
