China has taken another step toward opening its financial system to the rest of the world by expanding the range of investment options available to foreigners.
The reforms involve the Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors programs, and were announced late Friday by the government. They arrived on the same day that FTSE Russell became the last major bond index compiler to add Chinese sovereign debt to its gauges.
While the new rules were vaguely worded, they provide a framework for reforms that are to come into effect on Nov. 1. Regulators plan to release lists laying out the details for specific investment products, though no time frame was announced. The changes are focused on:
- Expanding the derivatives market by letting foreigners use financial futures, commodity futures and options.
- Giving foreigners the opportunity to repurchase bonds, allowing them to pledge notes they hold for cash, and potentially re-invest the funds in bonds.
- Opening the National Equities Exchange and Quotations, or NEEQ, stock venue in Beijing to overseas investors and also letting them engage in margin trading.
- Giving foreigners a channel to private investment funds.
These reforms come a year after China scrapped foreign investment limits in stocks and bonds, and mark its latest efforts to open its $16 trillion debt and $9.4 trillion equities markets. They also arrive as the yield on Chinese sovereign bonds due in a decade is near the highest level of the year at 3.11%, while returns on most notes in developed nations are near zero. That premium could be enticing to investors abroad.
Here’s what market watchers had to say about the changes:
Jackson Wong, Amber Hill Capital Ltd., asset management director in Hong Kong
We’ve been waiting for the QFII relaxation for a long time. It was expected to be announced in early 2020, but it was delayed due to the pandemic. This will help institutional investors to do all kinds of China-related asset investment. Derivatives will be a big help for hedging purposes, and the relaxation on bond investment is a sweet surprise for us, as it will facilitate investing.
Chen Jiaxiang, Hang Zhou Yu Yan Investment Management Co., which works with QFII and RQFII customers
That was a big day for QFII investors, finally allowing us to invest in derivatives and futures. This will change the landscape for many like us in that there can be more active investment instead of just passive investment, with derivatives and futures creating room for neutral strategies instead of long only, and the leverage increasing the potential of capital.
This may also be a warning bell for local institutions: there is not much time left to take it easy or bide their time. Though their strategies may have worked before, they are no match in terms of the amount of cash that foreign funds can raise.
Patrick Shum, director of investment management at Tengard Holdings Ltd.
It’s a sign China’s markets are becoming more and more open. It will provide more channels for foreign investors to diversify their investment strategies in China, which would definitely increase the A-share market’s appeal for them. With stock connect schemes in place and QFII quota limits lifted last year, China’s latest move shows that its willingness to gradually open up its capital markets remains unchanged.
Steven Leung, executive director at UOB Kay Hian (Hong Kong)
I expect the immediate impact on the market to be limited as China’s futures market isn’t very active. But it’s still an important step for China to gradually open up the domestic market, as many foreign investors would need derivatives for hedging purposes, and they could only do that in offshore markets like Hong Kong and Singapore before. This would also drive the development of China’s derivatives market and attract more capital inflows.
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