November 13, 2014 / 8:22 AM / 5 years ago

Hong Kong fund managers eye Shanghai stock linkup as China investment quotas run out

HONG KONG (Reuters) - Asset managers in Hong Kong, frustrated by the exhaustion of a major investment quota to enter China’s domestic market, now see a lifeline in the much-anticipated Shanghai-Hong Kong stock connect scheme due to be launched next week.

Floor traders work during afternoon trading at the Hong Kong Stock Exchange November 6, 2013. REUTERS/Bobby Yip

Some fund managers have been facing the prospect of turning clients’ new orders down as Hong Kong’s quota for the investment program was largely used up in September. The RQFII (Renminbi Qualified Foreign Institutional Investor) plan allows foreign investors to buy stocks and bonds in mainland China.

Those managers now plan to switch part of their equity products which are using the quotas to the new stock connect system, freeing up room for other RQFII-related products.

The Hong Kong and Shanghai link is due to go live on Nov. 17, giving foreign and Chinese individual investors unprecedented access to each others’ stock markets.

“The stock connect scheme offers us a potential channel to buy stocks listed in Shanghai once our RQFII product runs out of quota,” said Freddie Chen, head of sales at China Asset Management (Hong Kong).

The firm has more than 80 percent of its 21.8 billion yuan ($3.56 billion) quota used up or reserved for new products. That is a level that usually prompts fund managers to apply for a new quota from China’s State Administration of Foreign Exchange.

Quotas are typically assigned to financial centers which handle offshore yuan business, and then divided among fund managers in those locations.

However, the Chinese regulator has not yet replenished Hong Kong’s quota even though it has been virtually exhausted for nearly two months, forcing money managers to seek alternatives to meet clients’ growing demand for yuan assets. For a related story, click.

A large Chinese asset management firm in Hong Kong has been given approval by Hong Kong regulators to transfer part of its RQFII ETF to operate under the stock scheme and will make an announcement soon, according to a person with direct knowledge of the matter.

Fund managers say the freed up quota can then be used for other new products such as fixed income funds or multi-asset products that involve both bonds and equities to diversify product offerings and attract more investors.

As a result, product portfolios under the RQFII program will likely be skewed to focus more on assets other than A-shares. At present, equity ETFs targeting onshore stocks account for the lion’s share of RQFII products, compared to bond funds and ETFs.

For example, China CSOP, the biggest RQFII player with an aggregate quota of 46.1 billion yuan ($7.54 billion), sees more than 80 percent of its quota used for equity products among its mutual funds.

Still, the stock connect scheme will also operate under restrictions, with a daily quota capped at 13 billion yuan for Shanghai-bound investment, limiting the scope of fund mangers to make use of the scheme.

“Stock Connect is more appropriate for products where China A-share is an optional allocation, such as Asian equity funds, or as a complement to the existing QFII/RQFII quota,” said Chen.

Editing by Kim COghill

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