Facilitating client access to China’s A-share market under the qualified foreign institutional investor (QFII) scheme has been a major area of focus for Beijing Gao Hua Securities, Goldman Sachs’ joint venture partner in China, which sees high potential for the use of its QFII electronic trading platform.
The firm offers a global standard algorithm and direct market access (DMA) service tailored for the Chinese market to help offshore clients access the A-share market.
“Our DMA and algo services operate via standard FIX connectivity, with consistent coverage support and order validations,” said Wilfred Yiu, deputy CEO and COO of Beijing Gao Hua Securities. “QFII clients will enjoy the same service level and product quality as other Goldman Sachs electronic trading markets. Our coverage will handle client orders with the highest service standards.”
Yiu said the Goldman Sachs JV partner in China had seen strong client interest from offshore institutions to participate in the China market. While foreign firms wishing to trade in China have been able to do so under the QFII scheme since 2002, licenses are granted according to government quotas and are subject to strict conditions. Yet the pull of the country’s securities markets remains strong and regulators have recently increased the quotas as part of the opening up of the capital market.
Introduced in December, renminbi-denominated qualified foreign institutional investor (RQFII) status now lets Chinese financial institutions establish RMB-denominated funds in Hong Kong for investment in China, and institutional investors outside China to channel their investments of offshore RMB deposits back into Chinese capital markets.
“Electronic trading itself is not too different in China from the other markets,” said Yiu, explaining one difference was requirements for quota management by custody banks, brokers and clients, similar to that in other ID markets. “The exchange system is evolving, but real-time matching and market data are offered similarly to other global markets.”
However, Yiu said A-share positions bought on trade date cannot be sold on the same day. Broker routing is not allowed for onshore mutual funds that send their orders directly to the exchange, while each QFII client can only use one broker per exchange in practice.
Yiu’s optimism on trading increasing is based on expectations that Chinese regulators are providing additional QFII quotes to new and existing investors.
In its quarterly report in February, Hong Kong’s financial regulator, the Securities and Futures Commission, said 19 funds had already been authorised since the launch of the RQFII scheme.
And the China Securities Regulatory Commission (CSRC) increased the quotas for QFIIs to US$80 billion from US$30 billion, according to a statement on its website posted in April.
“In recent years, with an expanding economy and growing capital market in China, the demand of foreign institutional investors to enter the Chinese market continues to increase,” the statement read. “In order to meet the demand of overseas investors, and to further promote the stable development and opening up of the Chinese capital market, a joint decision has been made by CSRC, People’s Bank of China and State Administration of Foreign Exchange, with approval from the State Council, to add another 50 billion dollars to the current level of investment quota, which will make the total QFII investment quota stand at 80 billion dollars.”
The regulator had granted a total of US$24.6 billion in quotas to 129 overseas companies since the program first started in 2003 through the end of March. About 75% of assets were invested in Chinese stocks, with bonds and deposits taking up 13.7% and 9.6% respectively. The CSRC stepped up the issuance last month, granting a record US$2.1 billion of quotas to 15 companies, significantly higher than the US$1.9 billion in 2011 as a whole. The market capitalisation of equities held by QFII investors accounts for 1.09% of the free-float market capitalisation in the A-share market.
Up to April 2012, RQFII qualifications have been grated to 21 pilot institutions, while SAFE had approved a total quota of 20 billion yuan.
“The pilot program of RQFII is conducive for us to further open up the capital market, improve the return mechanism of RMB, better promote the internationalisation of RMB and to consolidate the position of Hong Kong as an international financial center,” the CSRC said on 4 April, explaining since it has been launched, the pilot program had received positive feedback from the market.
The CSRC added regulators have decided to add 50 billion yuan into the RQFII quota, allowing the pilot institutions to use it in issuing renminbi A-share ETF products, invest in A-share index shares and list them on the Hong Kong Exchange.
“As for the next stage, the CSRC will continue to research with concerning authorities to enlarge the scale of pilot program, scope of institutions and ratio of investment,” the CSRC said.