Accessing New Markets - All Roads Lead to China
Shanghai is home to one of the largest stock exchanges in the world
By Neer Gandecha and Julian Manfredi
As China continues to ease access to capital controls on foreign investors, investment managers are showing increased appetite for Chinese exposure. Chinese A shares have already joined some key equity indices with established plans to ramp up the weighting over time. Chinese bonds will join some key global indices next year and there is an expectation that more indices will follow suit. These are significant indicators of the direction of global investment into China. Historically, investment managers had to make an active allocation decision to invest in China, now it will be an active decision to abstain.
Global investors have been able to achieve some level of exposure to mainland Chinese equities since the 1990s via B shares and H shares. These shares were created almost exclusively for global investors, and as they are not fungible with A Shares, have given way to a dramatic price divergence between them and the equivalent A Share.
What are the options?
Investment managers looking to invest in Chinese bonds or equities generally have two options;
- Directly via the Qualified Institutional Investor (QFII/RQFII) or China Interbank Bond Market (CIBM) Direct schemes.
- Indirectly via Hong Kong Bond, Stock Connect programs
Either option can be appropriate, and the most suitable route will depend on a full evaluation of the investment manager's circumstances. This article will give a high-level overview and comparison of each route along with some common issues that you should be aware of. This should be enough to get started in your evaluation, however please get in touch via email@example.com if you would like further information.
Qualified Foreign Institutional InvestorThe Qualified Foreign Institutional Investor (QFII) and the newer Renminbi Qualified Foreign Institutional Investor (RQFII) programmes allow global investment managers access to Chinese securities. These are the most comprehensive mainland investment programmes available, however come with allocated quotas and more stringent requirements for investment managers.
For both schemes, registration and application for quota is arranged via your appointed custodian. This is quite a lengthy process and it is not unheard of for registration to take over 6 months.
Bond, Stock ConnectThe China-Hong Kong Stock Connect and Bond Connect (Northbound) programmes have created a streamlined mechanism for global investors to access China's mainland securities via Hong Kong. There are no individual quotas for investment, however the Stock Connect programme as a whole is limited by quotas on a net buy basis.
There is no licence required so getting started can be relatively rapid - most custodians should be able to get investment managers set up and ready to invest within a month. Your first point of contact should be your clients' global custodian who will guide you through the process. Be aware that you may have to liaise between the global custodian, sub-custodian and potentially even the end client, so while the process can be quick it can be quite involved. The complexity will obviously increase if you operate a multi-custodian model.
This table demonstrates the key similarities and differences in each access route. If you would like to ISC to assist with programme evaluation, or simply require further information please get in touch via firstname.lastname@example.org.
Once an option is decided, what is next?
Getting in touch with your custodian is a vital step, and in our experience, custodians have been very helpful in ensuring that there are no unexpected delays in gaining access to the market. It is tempting to limit your efforts to simply getting in touch with your custodian and shepherding the paperwork through, however, several aspects need to be addressed internally. These include:
- Ensuring that you will have a mechanism for adequate front-office cover in the trading periods. In London for example, trading closes as early as 7am.
- Ensuring that currency codes are set up in systems and staff are trained appropriately, this can be particularly tricky with offshore Renminbi as it is not an ISO currency code
- Creating or updating procedures to ensure that cash is adequately funded, this is vital due to the near instant settlement in some instruments (i.e. settlement can be attempted before operations staff even arrive)
- Contingency procedures, escalation pathways for teething problems
How ISC can help
ISC have front-to-back knowledge of investment management and have recent experience delivering Chinese market access to investment managers. ISC's experience ranges from assessing access methods, providing recommendations on access methods and project managing all aspects of implementation from front office to the custodian. If you would like to discuss how ISC can help you access China, or if you would like further information please get in touch via email@example.com.
Investment Solutions Consultants (ISC) provides trusted advice and expertise to the investment management community. ISC's goal is to provide practical solutions to the challenges facing investment managers. Our consultants understand the end-to-end operating model and vendor landscape that supports the industry. With a strong blue-chip client base, ISC helps its clients to maximise the efficiency and effectiveness of their operations and technologies.