China has extended the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme with a RMB 250 billion (USD $38 billion) quota in what marks yet another reform in the country.
This RQFII extension is the first time any quota has been extended to the US and will allow US financial institutions to deploy RMB raised offshore to invest in China. The decision to allocate quotas to the US under RQFII comes as China eagerly awaits a decision by MSCI to incorporate China A Shares onto its global indices.
“If Chinese-A shares are included on MSCI indices, it would result in increased passive fund inflows into China, in what would bring about greater market liquidity. This would be an exciting development. The RQFII extension to the US is part of the Chinese government’s efforts to internationalise the RMB, and comes following a number of reforms in the domestic market,” said Florence Lee, head of China sales and business development for Europe, Middle East and Africa (EMEA) at HSBC Securities Services, speaking at Fund Forum International 2016 in Berlin.
The US quota under RQFII is the second largest, with only Hong Kong enjoying a bigger quota, added Lee. Market volatility in China has led to significant capital outflows, which have been estimated to be as high as $1 trillion. Government efforts to restrict capital outflows have been enacted, although most believe the volatility has tailed off.
The last 12 months have seen a number of reforms enacted in China. Mutual Recognition of Funds (MRF) – after years of speculation – came into force in July 2015. Efforts have been made to allow more foreign investors to trade on the China Interbank Bond Market (CIBM). Shenzhen is also likely to join Stock Connect alongside Hong Kong and Shanghai during the course of 2016.