Since 2008, the Shanghai index has underperformed in comparison to other major market indices. In the last twelve months, as stocks in neighbouring Japan have gone up by 57%, the Shanghai index is down 10%.
Are foreign investors deterred from investing in China because they think that there is not much prospect of making profit, or are they put off by the difficulties of being granted permission to invest?
If it was easier to put their money to work, perhaps investors would enter more readily, and then the markets might look more attractive and subsequently rise.
Gaining status as a qualified foreign institutional investor (QFII) is the way in which most foreign institutions currently access renminbi-denominated investments in China.
The programme requires firms to receive a QFII investment licence from the China Securities Regulatory Commission (CSRC). After the licence is approved, the institution applies for a quota allocation from the State Administration of Foreign Exchange (SAFE).
Currently, the maximum quota stands at US$1 billion per QFII, which was raised from US$800 million in April 2012. However, if a big global fund applies for a quota, it may receive an amount well short of the sum it projects.
“Some of the individual QFII quotas are not large enough to attract big global investors,” says Mark Austen, chief executive officer of the Asia Securities Industry & Financial Markets Association (ASIFMA) in Hong Kong. “If you receive a small individual quota then it may not be economical to invest as the resources of a portfolio manager and team required to understand a still rather opaque market do not merit the potential returns. My understanding is that China will start addressing this and we expect to see sufficient quotas being given to the big global funds.”
In April, 2012, the QFII quota was raised from US$30 billion to US$80 billion, even though at that time only US$25 billion of the US$30 billion quota was being used. That represents only 2.1% of total domestic capitalisation.
“Chinese regulators are trying to strike a delicate balance between both providing and restricting direct foreign access to its capital markets,” according to a TABB Group report written by Andy Nybo, titled ‘Accessing China, a market inhibited by regulation’.
The cost of a QFII is also a problem for Asian funds. Barry Lau, the managing partner of Adamas Asset Management in Hong Kong, said
“We decided to shutter one project due to high QFII cost at peak times. While some of our portfolio managers, who are high frequency traders, may have made meaningful returns onshore, the offshore tracking error can be a huge distraction due to high QFII cost that could amount to as much as 2% per round trip and higher in periods of high trading. “
As QFII quotas limit foreign participation, the result is a mostly domestic investor base.
According to the TABB report, “regulators are also cognisant of the potential for retail investors to treat stock investing as a ‘get rich quick’ scheme more akin to casino gambling than to long-term investment purposes.”
In April 2012 the assets under management threshold for investment managers was cut from US$5 billion to US$500 million in order to qualify for a quota, whilst thresholds for commercial banks and securities firms were halved from US$10 billion to US$5 billion. At the same time, private equity firms were included in the asset management category but there is still no place for hedge funds.
In January 2013, the chairman of the CSRC stated that a potential ten-fold increase in QFII might be possible. That act would bring the potential exposure for foreign investors from the current 3.3%, to 15% of China’s market capitalisation.
Since 2008, the Shanghai index has underperformed in comparison to other major market indices. In the last twelve months, as stocks in neighbouring Japan have gone up by 57%, the Shanghai index is down 10%.
Are foreign investors deterred from investing in China because they think that there is not much prospect of making profit, or are they put off by the difficulties of being granted permission to invest?
If it was easier to put their money to work, perhaps investors would enter more readily, and then the markets might look more attractive and subsequently rise.
Gaining status as a qualified foreign institutional investor (QFII) is the way in which most foreign institutions currently access renminbi-denominated investments in China.
The programme requires firms to receive a QFII investment licence from the China Securities Regulatory Commission (CSRC). After the licence is approved, the institution applies for a quota allocation from the State Administration of Foreign Exchange (SAFE).
Currently, the maximum quota stands at US$1 billion per QFII, which was raised from US$800 million in April 2012. However, if a big global fund applies for a quota, it may receive an amount well short of the sum it projects.
“Some of the individual QFII quotas are not large enough to attract big global investors,” says Mark Austen, chief executive officer of the Asia Securities Industry & Financial Markets Association (ASIFMA) in Hong Kong. “If you receive a small individual quota then it may not be economical to invest as the resources of a portfolio manager and team required to understand a still rather opaque market do not merit the potential returns. My understanding is that China will start addressing this and we expect to see sufficient quotas being given to the big global funds.”
In April, 2012, the QFII quota was raised from US$30 billion to US$80 billion, even though at that time only US$25 billion of the US$30 billion quota was being used. That represents only 2.1% of total domestic capitalisation.
“Chinese regulators are trying to strike a delicate balance between both providing and restricting direct foreign access to its capital markets,” according to a TABB Group report written by Andy Nybo, titled ‘Accessing China, a market inhibited by regulation’.
The cost of a QFII is also a problem for Asian funds. Barry Lau, the managing partner of Adamas Asset Management in Hong Kong, said
“We decided to shutter one
project due to high QFII cost at peak times. While some of our portfolio
managers, who are high frequency traders, may have made meaningful returns
onshore, the offshore tracking error can be a huge distraction due to high QFII
cost that could amount to as much as 2% per round trip and higher in periods
of high trading. “
As QFII quotas limit foreign participation, the result is a mostly domestic investor base.
According to the TABB report, “regulators are also cognisant of the potential for retail investors to treat stock investing as a ‘get rich quick’ scheme more akin to casino gambling than to long-term investment purposes.”
In April 2012 the assets under management threshold for investment managers was cut from US$5 billion to US$500 million in order to qualify for a quota, whilst thresholds for commercial banks and securities firms were halved from US$10 billion to US$5 billion. At the same time, private equity firms were included in the asset management category but there is still no place for hedge funds.
In January 2013, the chairman of the CSRC stated that a potential ten-fold increase in QFII might be possible. That act would bring the potential exposure for foreign investors from the current 3.3%, to 15% of China’s market capitalisation.