China’s scrapping of QFII and RQFII caps on foreign investment will have a very limited effect, say analysts
- Beijing’s recent decision to remove quotas on the QFII and RQFII schemes carries only symbolic significance as the programmes are quickly becoming obsolete, say analysts
- The programmes’ popularity has declined as investors have turned increasingly to the stock connect and its bond equivalents
On the face of it, China’s recent move to scrap two important quotas limiting foreign investment in the country’s equities was a major step towards market liberalisation.
But in reality it will make very little difference because the programmes under which the caps operated were already becoming somewhat redundant, according to analysts. In fact, the quotas that have been removed had been in no danger of being breached for at least a decade.
China announced on September 10 that it would removed the quota limits on the qualified foreign institutional investors (QFII) scheme, and the renminbi qualified foreign institutional investor (RQFII) programme, a gesture that would further open its capital markets to the world.
However, analysts said both equity and bond investors had been relying more heavily on other cross-border channels with better arrangements in place to allow easier access to trade in China. It was not the quotas that were constraining them from investing more through QFII and RQFII.
“SAFE [China’s foreign exchange watchdog] has never refused the quota applications since 2007, especially on the back of local currency depreciation, so [even with the quotas scrapped], capital inflows will not jump in the short term,” said Xing Zhaopeng, an economist with ANZ.
In particular, foreign investors have been turning more and more to the so-called stock connect schemes that allow them to buy and sell equities in Shanghai and Shenzhen, and similar channels for bond trading.
“Rather than using QFII and RQFII, in recent years most foreign investors have been utilising the stock connect, bond connect and the CIBM [China Interbank Bond Market] channels to buy into domestic listed China A-shares stocks and onshore bonds,” said Anthony Wong, Portfolio Manager of Allianz Global Investors.
