China likely to relax limits on access to onshore stocks via ETFs in yuan

HONG KONG Thu Feb 7, 2013 2:26am EST

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HONG KONG Feb 7 (Reuters) - China is expected to allow brokerage firms and banks to enter the mainland stock market via exchange-traded funds (ETFs) denominated in yuan, a move that would terminate the monopoly of mutual fund companies in the fledgling market.

Market players are speculating about such a move after an announcement in November about changes to the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, a channel for foreign investors to enter mainland capital markets with offshore yuan.

Under the plan, the scheme would be expanded by 200 billion yuan ($32.09 billion) in quotas, without specifics on who would be allowed to take part.

China introduced the RQFII programme with an initial quota of 20 billion yuan to invest in mainly onshore bond markets in late 2011, and raised it by 50 billion yuan last April to allow investment in its stock markets through ETFs.

However, only Chinese fund houses or their joint ventures have been given approval to launch such ETFs so far, given other financial institutions did not meet the requirement that their parent companies have relevant experience in mainland China.

The Hong Kong Securities and Futures Commission (SFC) on Wednesday listed additional minimum requirements on its website for management companies that want to launch RQFII ETF products, but do not have a mainland parent company with related qualifications.

It requires the management company to have at least one key employee with at least 2 years of management experience with a physical A-share ETF portfolio, and the ETFs need to adopt a full physical replication strategy.

Physical yuan ETFs invest in all constituent stocks with the same weightings as those in the benchmark. By comparison, synthetic ETFs use swaps or other derivatives to gain exposure to a benchmark.

The company must also retain a reputable mainland, Hong Kong or international firm acceptable to the SFC as its investment adviser for at least 1 year after listing of the RQFII physical A-share ETF.

The SFC said it may consider modifying or not requiring strict compliance with the above requirements on a case-by-case basis if the company has a proven track record in managing ETFs in reputable markets.

Trading of RQFII A-share ETFs was quite active in the past few months and asset managers accelerated their pace of applying for additional quotas, boosted by foreign investors seeking higher returns.

The benchmark Shanghai Composite Index has jumped more than 20 percent since December, outperforming the MSCI's broadest index of Asia-Pacific shares outside Japan . ($1 = 6.2317 Chinese yuan) (Reporting by Michelle Chen; Editing by Kim Coghill)

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