Capital gains?

Pinning their hopes on RQFII

Acouple of months ago, WiC reported on the progress of the Shanghai stock exchange’s long-anticipated international board (WiC129). The executive in charge of the project said that arrangements were “basically ready” and that trading would start “as soon as possible and when the time is ripe”.

For foreign companies looking to soak up Chinese capital with a listing in Shanghai, the announcement suggested that their wait was almost over. But not quite yet, it seems. Comments by Han Zheng, the mayor of Shanghai, suggest that the plans are on hold once again.

“Timing is very critical to the introduction of the international board,” Han told a news conference, reports Reuters. “In my opinion, at the moment, this is not good timing. So there is no clear timetable for the international board.”

The announcement was probably motivated by the poor performance of domestic stocks, with the A-share index down by more than a fifth last year, making it one of the world’s worst performing markets.

There are probably two major concerns here. The first is that a Chinese bourse selling shares in foreign companies might distract investors from buying domestic stocks, further pulling down share prices. And policymakers will also want the new board to start out as a success, with oversubscribed listings. Both concerns will reduce if market conditions look more robust – so expect the launch plan to be reviewed should performance improves over the next month or two.

But while foreign companies are still cut off from fund-raising in China’s stock markets, overseas investors are starting to enjoy greater access.

Last week, the securities regulator announced that it had granted 14 further licences in December to foreign investors wanting to buy domestic shares as part of the Qualified Foreign Institutional Investor Programme (QFII). In fact, December was the busiest month for QFII approvals since the scheme started in 2003, bringing the total number of licences to 135, reports the Financial Times.

Last year, the government stopped handing out new QFII approvals, with the focus then on cutting inflation. Now that inflation seems under control (and with China as a whole experiencing a capital outflow in the last quarter of 2011) it appears that foreign money is back in vogue as a way of buoying local markets. Quotas for foreign investment in Chinese stocks now stands at $21.6 billion and analysts expect a flurry of further licence approvals over the next few months.

In addition to expanding QFII, the government has also launched the Renminbi Qualified Institutional Investor Programme (RQFII), which allows foreign investors to purchase A-shares and fixed income securities with offshore renminbi (the State Administration of Foreign Exchange has allocated an initial quota of Rmb20 billion or $3.16 billion). Hong Kong looks like being the early beneficiary as the new scheme gives preference to funds domiciled in the city, boosting the territory’s asset management industry.

Although the initial quota is small in size, RQFII could quickly become an important route for offshore renminbi to return to China as investment. The securities regulator is now talking about how to “make breakthroughs” in the scheme to a broader range of institutions and assets, according to the Shanghai Securities News.

But perhaps the biggest boost to the A-share market will come from local money, now that regulators seem willing to allow local pension funds to allocate around Rmb100 billion of capital into the markets, the China Securities Journal reported last week.

Making it easier for funds to invest in A-shares is one thing. But whether institutional investors will take advantage of the opportunity is another. Although the A-share market has rallied since the beginning of the year, a lot of investor cash continues to sit on the sidelines. If that changes, the Chinese markets could rebound, delivering a much more positive year.

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