Cross-border investment flows into China will receive a boost from the removal of foreign investor quota restrictions under the Qualified Foreign Investor (QFI) programme and reforms to the CIBM Direct scheme for onshore bond investments.
These are key findings of Funds Europe’s China Investor Survey 2020, conducted in partnership with Standard Chartered.
With Chinese regulators advancing a wide array of policy proposals designed to enhance market access and to improve market efficiency, the survey asked respondents to prioritise which of these reforms will have the greatest impact on their business.
Survey participants were asked to score each policy proposal as high, medium or low priority. These were then ranked in order on the basis of a weighted-arithmetic mean score, with a higher score indicating that a factor holds greater importance to respondents (fig 1).
From this agenda, respondents attached highest priority to the revocation of quota restrictions for the Qualified Foreign Investor scheme (which, from November 1, 2000, combined the erstwhile QFII and RQFII schemes) and to proposals to allow block trading on Stock Connect.
Investors continue to push for flexible mechanisms to support FX hedging, including proposals to allow third-party FX hedging in the QFI programme.
Although securities lending and borrowing is allowed under Stock Connect this, to date, has been limited to brokers (‘exchange participants’). Respondents predict that the extension of this programme to institutional investors, asset managers and custodians (lending on behalf of asset owner clients) will boost lending activity and provide a stimulus to the market through enhanced liquidity and settlement fails coverage.
Alongside this package of reforms, three Chinese regulators – the People’s Bank of China (PBoC), the China Securities Regulatory Commission and the State Administration of Foreign Exchange – jointly issued a consultation paper on 2 September 2020 relating to potential changes to China’s fixed income markets.
This consultation paper outlines a mechanism through which qualified investors can trade cash bonds in both the exchange bond market and the interbank bond market, through the connected infrastructure for these two markets, without being required to apply for additional approvals.
With the introduction of multi-tier custody arrangements, CIBM Direct investors can access the market via a local custodian or employ a global custodian to manage local settlement and asset servicing requirements via their Chinese sub-custodian (with client assets held in account in the global custodian’s name).
CIBM Direct provides a direct route for foreign investors to access onshore bonds in the China Interbank Bond Market.
Effective from 1 September 2020, the China Foreign Exchange Trade System (CFETS) also extended the opportunity for bond investors in CIBM Direct to trade across multiple counterparties via a request for quote (RFQ) mechanism based on quotes provided by market makers in the CFETS system. The CIBM Direct Trading Service is provided by CFETS in collaboration with Bloomberg and TradeWeb.
CFETS is the interbank trading and foreign exchange division of PBoC, China’s central bank.