China eases QFII foreign investment rules in boost to channel use

SHANGHAI/HONG KONG (Reuters) - An easing of restrictions on foreign fund manager outflows from China will give overseas investors more comfort investing in the mainland, bankers and consultants said.

Beijing on Tuesday lifted a monthly 20 percent cap on the funds that investors have been allowed to take out China via the dollar-dominated qualified foreign institutional investor (QFII) scheme and its yuan-denominated sibling, RQFII.

The QFII channel, first introduced more than a decade ago, has been one of the main means for foreigners to invest in China. Although partially superseded by the Stock and Bond Connect schemes linking Hong Kong and mainland markets, the QFII quota - the amount each investor is allowed to invest under the scheme - offers the potential to invest beyond traded securities.

In the latest changes, regulators also removed lockup periods for investment principal, and said they would allow investors using the schemes to hedge currency risk onshore.

"The new rules naturally support the QFII and RQFII regimes - making them far more liquid and transparent," said Antony Shaw, head of institutional and wealth sales, Asia-Pacific at HSBC HSBA.L0005.HK.

The availability of onshore hedging could cause some investors to look again at the QFII schemes, Shaw said.

“We expect that some clients who looked at the Connect route and shelved conversations around the QFII and RQFII channels will now reopen dialogue.”

Before this week’s announcement, investors using QFII and RQFII and the Connect schemes have only been able to hedge currency risk with the freely-floated version of the yuan traded outside the mainland.

This has proved difficult for some investors as liquidity in the offshore yuan is limited and it does not precisely followed its onshore counterpart.

The reforms are also likely to attract more investment into China.

“These changes will have the effect of not penalizing investors who are in earlier schemes compared with those that came later,” said Mark Austen, chief executive of industry group the Asia Securities Industry and Financial Markets Association.

Austen said previously there had been a perception that investors were better off waiting for a new form of access rather than using existing channels, causing some to delay.

The move also came less than two weeks after U.S. index publisher MSCI included some China-listed shares in its emerging market benchmark.

“This is in line with China’s general policy of opening-up, and could help shorten the process toward China’s full inclusion into MSCI,” said Ivan Shi, head of research at fund consultancy Z-Ben Advisors.

Reporting by Samuel Shen, Beijing Monitoring Desk, and Alun John in Hong Kong; Editing by Simon Cameron-Moore