CNH Tracker-China must chop down regulatory thicket to woo investors

Wed Jan 29, 2014 8:50pm EST

By Michelle Chen
    HONG KONG, Jan 30 (Reuters) - Higher quotas, fewer
regulatory restrictions and clearer tax guidelines are needed to
give foreign investors greater access to China's markets through
a pilot investment scheme.
    Despite worries about China's shadow banking sector and a
slowing economy, the Renminbi Qualified Foreign Institutional
Investor (RQFII) scheme, which allows overseas funds to buy
onshore assets in yuan, has made huge strides in recent months
thanks to buoyant demand from investors looking for chunky
yields and a stable currency.
    The first yuan exchange-traded fund (ETF) under the RQFII
scheme was listed in London in January while a Chinese
government bond ETF and the second yuan ETF listed in the United
States. under RQFII is expected to launch shortly.
  
    The RQFII scheme, launched in 2011, allows financial
institutions to use offshore RMB to invest in the Chinese
mainland securities markets, including stocks, bonds, and money
market instruments.
    Regulatory restrictions are also being eased.
    RQFII applications in Singapore and London are likely to
quicken. The China Securities Regulatory Commission (CSRC), the
market regulator, sent a notice last week to custodian banks,
confirming that license application and investment operations in
those two places would be the same as in Hong Kong, a source
told Reuters. 
    The simple procedures to obtain licenses bode well for a
strong pipeline of diversified RQFII products available to
investors beyond Hong Kong, boosting the use of the renminbi in
global trade. 
    But relatively small quotas and a pending withholding tax
issue means global funds investing in China will find it a slog
for now. 
    "RQFII quotas are still too small for institutional
investors who won't bother to allocate assets in China unless
$100-200 million can be distributed to them," said Ding Chen,
chief executive officer at CSOP Asset Management, the largest
RQFII products provider with total quotas of around 34.1 billion
yuan ($5.63 billion).
    At present, most of the quotas granted to an RQFII product
by the State Administration of Foreign Exchange (SAFE) are no
more than 2 billion yuan ($330.53 million) and thus the share
each institutional investor finally gets is even lesser.
    In Ding's view, all global investors have so far held an
underweight position on China, because Chinese stock indices
have not been adopted in international benchmarks, but also due
to lack of channels and quotas to invest into China.    
    Taxes are another headache.
    The current regulations have not specifically stated if
RQFII and its older cousin the Qualified Foreign Institutional 
Investor (QFII) programme are subject to taxes in China or if
they are totally exempted. 
    As a result, fund managers have to make withholding tax
provisions, though the Chinese government has never collected
it, making any products marketed under these schemes costly.
    The uncertainty on the tax front has in some degrees
dampened interests from international investors and affected
sales of related products, prompting Chinese money managers to
seek ways to dodge this issue.RECENT STORIES:
CNH Tracker-Trade, not deposits, may be London's calling  
 
China money manager applies for new quota for yuan product in
London 
    
More stories about the CNH market                 
Daily onshore yuan reports                        
Daily China money market reports                  
  
Offshore yuan rate    Onshore yuan rate  
Offshore yuan dealt Onshore yuan on CFETS 
  
THOMSON REUTERS SPEED GUIDES
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.