CNH Tracker-Expansion of China's RQFII scheme to draw more yuan inflows

HONG KONG, July 10 Wed Jul 9, 2014 11:58pm EDT

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HONG KONG, July 10 (Reuters) - As China hurries to extend the yuan's footprint beyond Hong Kong, it is also quickly opening up its domestic capital markets to foreign investors hungry for yield.

The expansion of the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme is poised to see faster yuan flows to China as it is much easier for investors now to enter the country than via the older QFII programme.

China announced in the past week it would grant a quota of 80 billion yuan ($12.9 billion) to Germany and South Korea, respectively, adding to the existing 480 billion yuan quota allocated to Hong Kong, Singapore, the UK and France.

Launched in 2011, the RQFII scheme allows financial institutions to use offshore yuan to invest in the mainland's securities markets, including in stocks, bonds and money market instruments.

Compared with its cousin QFII which was denominated in the dollar and launched in 2002, RQFII has many advantages since it has far fewer restrictions on investment targets and cross-border yuan movement.

QFII and RQFII are among the very few channels through which foreign investors can tap China's onshore market.

Foreign investors under RQFII can make investments in China's bond and stock markets at their own discretion; while QFII investors have to invest at least 50 percent of their funds in equities and hold no more than 20 percent in cash.

However, China's stock market performance has been so far the worst in the world this year, in dollar terms, Thomson Reuters data show. The IBES MSCI China Index trades at 1.44 times book value, near its cheapest levels since Thomson Reuters Datastream began compiling the data in 2004.

The bond market looks appealing though with 10-year government bonds yielding around 4.15 percent, about 20 basis points higher than its counterpart in Hong Kong's dim sum bond market where global investors have easy access.

In terms of repatriation, RQFII investors enjoy daily liquidity for open-ended funds and are able to use both yuan and dollars to repatriate principals and gains with no limit imposed on the amount.

For QFII investors, proceeds remittances can only be realised on a weekly basis or after a lock-up period, and there is a cap on how much investors can transfer across borders.

The popularity of the more flexible RQFII scheme is reflected in the pace at which the Hong Kong quota has been taken up as well as the fact that more QFII investors such as Schroders, BlackRock and Value Partners have started to apply for RQFII licences.

The outstanding amount under RQFII stood at 250.3 billion yuan ($40.3 billion) in June, statistics from the State Administration of Foreign Exchange (SAFE) showed, accounting for more than 90 percent of the quota Hong Kong has.

In comparison, the outstanding amount of QFII quota was $56.5 billion for the month, only about a third of the total $150 billion quota China has promised.

Concerns about investing in China persist, however, under both QFII and RQFII, as the world's second-largest economy is still waiting for more signs of recovery and its currency has yet to regain sustainable strength.

China's economy probably steadied in the second quarter with annual growth at 7.4 percent, the lowest level in 18 months, a recent Reuters poll showed.

WEEK IN REVIEW:

* China will give investors in Germany the right to invest up to 80 billion yuan ($12.9 billion) in China's capital markets under the RQFII scheme, the Chinese government said on Monday.

* China's central bank said on Friday it had appointed the Bank of Communications , the country's fifth-biggest lender, as the yuan clearing bank in South Korea.

* China's central bank will allow companies and individuals in Tianjin Eco-City to conduct cross-border yuan transactions with Singapore, following in the footsteps of the Suzhou Industrial Park trial which was approved last month.

* Bank of China Paris branch completed its sale of 2 billion yuan ($322.53 million) in dim sum bonds. The bonds were priced at 3.35 percent for the 2-year tranche and 3.85 percent for the 5-year tranche, according to a term sheet seen by Reuters.

CHART OF THE WEEK:

China stock market performance lags peers in Asia this year: link.reuters.com/puz32w

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($1 = 6.1961 Chinese Yuan Renminbi) (Editing by Jacqueline Wong)

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