| HONG KONG, July 10
HONG KONG, July 10 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
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:
CNH Tracker-Offshore yuan deposits to pick up despite hiccups in
Chinese assets warm, not hot for Western investors
China's yuan global ambition faces payments hurdle
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
($1 = 6.1961 Chinese Yuan Renminbi)
(Editing by Jacqueline Wong)