The quota allocation – the first of its kind awarded to the United States – was announced on June 7, 2016 by Yi Gang, Deputy Governor of the People’s Bank of China, the country’s central bank. This represents an apparent effort to broaden the overseas use of China’s currency, the yuan, and to lure capital back to mainland China. Additional details are expected to be forthcoming.
The RQFII program is one of the principal channels through which non-China-based asset managers may make a range of investments in China, including fixed-income and equities listed on both the Shanghai and Shenzhen stock exchanges. While other Chinese investment programs exist (e.g., the similarly structured qualified foreign institutional investor program (QFII), Shanghai-Hong Kong Stock Connect, and the new Chinese Interbank Bond Market (CIBM) access program), RQFII is notably more flexible and broader in investment scope.
Until this announcement, it had been unclear when, if ever, managers based in the United States would be allowed to participate in the RQFII program – RQFII quota historically had been given only to managers in specified jurisdictions (including Hong Kong, Singapore, the United Kingdom and Germany), and the United States was notably absent from this list.
However, the quota now expected to be granted to the United States would be the second largest to date, behind only the 2011 quota granted to Hong Kong (270 billion yuan). Without providing any definitive timelines, Mr. Yi also stated that the country will work toward simplifying the quota application procedure for both RQFII and QFII programs in order to allow more foreign companies to access Chinese markets. The RQFII announcement also means that a U.S.-based investor onshore can make investments in Chinese securities without routing such investments through an offshore affiliated entity. Yuan clearing should also be possible in the United States in the future; a bank has been selected but not announced.
The move comes as part of a concerted effort by the Chinese government to broaden market access, in advance of the impending decision by index provider MSCI Inc. later this month regarding whether to allow China-A Shares to be included on its global indices. The announcement further reflects a continued trend toward RMB internationalization, as China seeks to foster increased liquidity and stability in its financial markets through foreign investment. This decision comes on the heels of Chinese efforts to attract foreign medium- and long-term investors with the CIBM access program announced in February 2016, which provides non-China-based asset managers with access to China’s largest bond market without imposing quota constraints.