Beijing has scrapped the quota system for its two main inbound investment schemes, potentially dealing a blow to Hong Kong’s status as the main conduit for international investors trading stocks and bonds in mainland China.
The State Administration of Foreign Exchange’s announcement on Tuesday that it will abolish previous quota limits for the Qualified Foreign Institutional Investor scheme and its renminbi-denominated sibling, RQFII, comes after a flurry of recent initiatives designed to better integrate China’s domestic capital markets with the rest of the world.
Last week, BNP Paribas and Deutsche Bank became the first two banks to receive licences to act as lead underwriters on all non-financial corporate bonds in the interbank bond market.
Several foreign banks are also applying to acquire majority shareholdings in their Chinese securities joint ventures for the first time after Beijing relaxed the rules on ownership. UBS so far is the only bank to achieve the feat under the new rules.
In February, the China Securities Regulatory Commission published draft plans to combine QFII and RQFII and also broaden the investment scope to include derivatives, bond repurchases and private funds.
The securities regulator’s proposals were interpreted at the time as a potential threat to Hong Kong, which has become the preferred channel for international investors seeking exposure to mainland China through its various trading links, Shanghai and Shenzhen Stock Connect and Bond Connect.
The Stock Connect schemes are preferred because investors are not required to set up trading accounts in mainland China and there is an absence of restrictions such as on outbound remittances and principal lock-up, although regulators have eased some of those constraints in recent years.
At the end of 2018, 309 overseas institutions had been awarded US$101.1bn of investment quotas under the QFII scheme, according to CSRC. For RQFII, 233 foreign institutional investors had been awarded quotas of US$281bn.