Foreign investors have previously accessed Chinese capital markets through the Qualified Foreign Institutional Investor scheme, and since December last year the Renminbi Qualified Foreign Institutional Investor scheme – which uses offshore renminbi funds – has broadened foreign investment in China. The development of these products is now gaining momentum, and the scheme has given a first-mover advantage to domestic Chinese firms, putting brands that are little known outside China on the international stage. 

China’s fund management industry is gaining international attention as the country opens up its capital markets and allows more offshore renminbi – or CNH – to flow back to mainland China. 

A pool of offshore liquidity has been building in Hong Kong in the first stage of making the renminbi an international currency that will one day be easily converted as the US dollar. But until recently, not much could be done with the CNH deposits sitting in Hong Kong’s banks. That, however, has begun to change with the introduction of the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, which has opened up a channel for foreign investors to use offshore renminbi to invest in China’s stock markets. 

“In China this is very exciting – the RQFII scheme is a significant development,” says Ying White, a Beijing-based partner at law firm Clifford Chance. She explains that the options for investors to use CNH were previously limited to dim sum bonds or direct investment in China. With RQFII, she says, “this gives foreign investors an additional channel of exposure in China.”  

Long-term intentions

There has been criticism that the relaxing of rules to make it easier for foreign investors has been a short-term attempt by the Chinese authorities to boost demand in the stock markets. Other observers say, however, that the RQFII quotas are a drop in the ocean compared to the overall capitalisation of the market and the renminbi scheme signals long-term intentions. “The introduction of RQFII marks a milestone in opening up China’s capital market and the internationalisation of the Chinese currency,” says Nathan Lin, managing director of E Fund Management (Hong Kong). 

The RQFII scheme was launched in December 2011 with a trial quota of Rmb20bn ($3.2bn), which was increased to Rmb70bn in April 2012. So far, the licences and quotas have only been granted to Hong Kong subsidiaries of Chinese firms, giving domestic fund managers a first-mover advantage over their foreign rivals. 

Alfred Mak, head of investment products and advisory at Bank of East Asia (BEA), says that for onshore asset managers, whose brands are not well known outside China, “it brings their name to international investors”. At one such firm, China International Fund Management, head of business development Tommy Yu agrees that RQFII has created an international platform for Chinese fund managers. “This platform is very important for us to do international business,” he says. 

Same difference

The advantage given to domestic firms is noticeably different to the introduction of the Qualified Foreign Institutional Investor (QFII) scheme in 2002, which allowed foreign-denominated capital to be converted into renminbi before it was invested in China’s stock markets. Keith Lie, a partner at PricewaterhouseCoopers, notes that the QFII scheme quotas went mostly to foreign institutions. 

There are differences in the investment and trading styles between international investors and Chinese investors

Ding Chen

Any complaints that foreign companies were being favoured appear to have been addressed with the launch of the recent renminbi scheme. With the first batch of RQFII funds, 19 were authorised but they were limited to a minimum of 80% bonds and a maximum of 20% equities, which meant that the 19 funds were near-identical, and some were launched within a week of each other. “This lack of product differentiation, relatively high fees, and weak brand recognition in the Hong Kong market for these Chinese subsidiaries led to a tepid response from mass retail investors, with only a few firms reaching their initial fundraising goals, though committed institutional investors did contribute,” says Jonathan Ha, director of advisory services at Z-Ben Advisors. 

“People just got confused,” says Mr Mak at BEA, of the retail investors in Hong Kong who were confronted with similar products from Chinese funds they had not previously heard of.  

Mr Lin at E Fund Management (Hong Kong), which launched a RQFII renminbi fixed-income fund in February, says: “We had a hard time differentiating ourselves from the competitors in the beginning. Although E Fund Management is the second largest mutual fund manager and largest index manager in China, we are much less known outside of the country.”  

Rolfe Hayden, partner at law firm Simmons & Simmons, says that the success of the first batch of renminbi RQFII funds should not simply be measured along commercial lines, and because of the 80% bond requirement there was not an expectation that these would be exciting products. “It should be seen as a first step," he says. 

Ding Chen, CEO of CSOP Asset Management, adds that the RQFII products give investors more incentive to hold renminbi. “In the long run, these products will be a pivotal force in the internationalisation of the renminbi,” she says. “There are differences in the investment and trading styles between international investors and Chinese investors. Offshore renminbi products and offshore renminbi itself are still on the development trajectory. It will take time for investors to be comfortable with investing in RQFII products.”

Take two 

The type of products got more interesting with the second RQFII batch, which permitted renminbi exchange-traded funds (ETFs). Ms White at Clifford Chance says of the introduction of ETFs: "This is the market’s way of leveraging what is permitted to create more attractive products for investors.”

The first such RQFII A-share product was the China Asset Management Company’s CSI 300 Index ETF, which was listed on the Hong Kong Stock Exchange in July. Unlike other synthetic A-share ETFs, the RQFII products were physical ETFs that were backed by physical shares and not based on derivatives.

The introduction of RQFII marks a milestone in opening up China’s capital market and the internationalisation of the Chinese currency

Nathan Lin

Jane Leung, BlackRock’s head of iShares for the Asia-Pacific region, says: “While the use of RQFII quota for ETFs is a further endorsement of the ETF category, the new RQFII products have remained far less liquid than the iShares FTSE A50 China Index ETF, which remains the largest A-Share ETF in the world with approximately HK$42bn [$5.42bn] in assets, and turnover of about $120m a day, and product of choice for investors looking for liquid access to China.”

Building on the lessons learned from the first round of RQFII products, the second batch of RQFII ETFs were launched at staggered intervals with each of the funds tracking different indices. And there have been fewer providers, with only four Hong Kong subsidiaries launching RQFII ETFs: China Asset Management, CSOP Asset Management, E Fund Management and  Harvest Global Investors, which listed its fund most recently, in October. 

Mr Lin of E Fund Management (Hong Kong), which launched its A-share ETF in late August, says, “Compared to synthetic A-share ETFs in Hong Kong, the RQFII A-share ETF – a physical ETF – has the advantages of lower costs and freedom from counterparty risks typical of market access products.”

Mr Lie at PwC notes that the four firms have launched different products, which has been a move toward differentiation that the RQFII market has needed. “You need a supermarket of products. Right now, they do not have that,” he says.

A valuable lesson

The development of the RQFII scheme and the products that lie within it provided a number of lessons for the Chinese firms, according to Mr Ha at Z-Ben Advisors. “From the perspective of the Chinese firms, whose Hong Kong subsidiaries have been launching RQFII products, the RQFII scheme has been a valuable lesson, giving them the necessary experience in product development, distribution, sales, marketing, and the all-important client servicing – practically non-existent in China – needed to truly develop a robust business outside of their native [country],” he says.

Mr Ha points to the structural challenges that Chinese firms are facing when entering the Hong Kong market for the first time. “Outside of China, marketing, sales and distribution are vastly different, and most Chinese firms are currently unprepared to develop the in-house capabilities and critical business partnerships required for success. This is more difficult to overcome, yes, but something that will certainly be addressed over time,” he says.  

Now Chinese firms are able to play a significant role in inbound cross-border investments, a role that was previously done by foreign firms through the earlier QFII scheme. 

[China's asset management] industry could triple in size in the next three years

David Russell

“From the standpoint of Chinese firms, this has been a long time coming and actually makes a lot of sense, as these firms are likely the most knowledgeable in terms of investment market knowledge, a critical element of managing onshore investments on behalf of foreign investors," says Mr Ha. “Now that the China Securities Regulatory Commission has finally answered the call to allow Chinese firms to compete for foreign capital, there are significant competitive repercussions that foreign asset managers must now contend with, as these Chinese firms continue to expand their business into Hong Kong and very soon, into other global markets.”

Scheme expansion

So far the role of foreign banks in the RQFII scheme has been limited to being a distributor of the funds, but there is the expectation that the scheme will be eventually be expanded so that foreign firms will gain RQFII licences and be able to issue their own products. Some foreign companies have accessed the market through joint ventures with Chinese fund managers, but observers say there has been a preference to wholly owned Chinese companies in the granting of the initial RQFII licences. In the second batch of ETFs, Harvest Global Investors – the Hong Kong subsidiary of Harvest Fund Management, a joint venture with Deutsche Bank – was a notable exception to this observation. 

As the market opens up to new competitors, the Chinese companies will have to play to their strengths of knowing their domestic market. Mr Yu at China International Fund Management – a Sino-foreign joint venture with JPMorgan – says that the firm plans to open a Hong Kong subsidiary and launch an RQFII fund in the beginning of 2013. “Next year there will be some big competition,” he says of the anticipated expansion of the RQFII scheme. 

Once the scheme is opened to wholly foreign firms, Chinese firms could find it difficult to compete in the mature competitive market of Hong Kong, which they have only recently entered. China International Fund Management’s strategy, says Mr Yu, is to leverage the resources from the mainland home company. 

Strong potential

For now, the foreign competition is being kept at bay by the restrictions on the RQFII scheme and there is little opportunity for foreign firms to make their mark in the near future. Ms Cheng at CSOP Asset Management says: “With the gradual broadening of the scheme, it makes sense for more foreign firms to participate in the market. Moreover, we believe the diverse range of participants and the resulting competition will promote the participants to improve their ability to manage and invest in the A-share market. Though at this stage it is difficult to foresee who will be dominant in this space.” 

While many foreign players have yet to formulate their strategy for China, David Russell, Citi’s Asia region head for securities and fund services, points to the potential of the market, despite the relative stagnation in China’s asset management industry of late. “The industry could triple in size in the next three years,” he says. 

A Citi-commissioned report by Z-Ben Advisors states that China’s share of global market capitalisation is currently 11% and global investors are significantly underweight to Chinese equities, currently at 0.1%. Global investors’ allocation to China could gradually increase tenfold, or even more, the report adds.

Mr Russell believes that the domestic players have reasonable scale and are looking to expand. “Chinese asset managers are serious about international expansion – they will be genuine international contenders,” he says. 


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter