In its ongoing effort to retain capital onshore, China has extended an investment program to US-based asset managers, providing another funding source to Chinese companies and multinationals (MNCs) operating in China.
The RMB Qualified Institutional Investors (RQFII) program has been available to investors in specific jurisdictions, including Singapore, the United Kingdom and Germany, but the US has been conspicuously absent from the list. Yi Gang, deputy governor of the People’s Bank of China (PBOC) announced in early June that the United States would receive a $38 billion quota for investments in China, second only in terms of volume to Hong Kong’s.
“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,” noted global specialist law firm Dechert in a note to clients.
Karl J. Paulson Egbert, a partner at the law firm, said that despite delays in the RQFII’s implementation in some jurisdictions, he expects that in the US it will become operational shortly, given China’s desire to usher in and retain more capital onshore.
A year ago, China issued rules making it easier for large institutional investors to access its $5.7 trillion interbank bond market, in an effort to further open its capital market and retain renminbi (RMB) onshore, and then in May expanded the program to most fund managers. As a result, institutional investors, including global financial institutions, foreign central banks and sovereign wealth funds, no longer must obtain pre-approval to trade bonds, interest-rate swaps and conduct repurchase agreements, and instead must only fill in a short registration form and decide how much they can invest.
More recently, the PBOC published a notice in early May announcing the extension of a pilot program that expands a foreign debt quota system for both foreign and domestic organizations and expedites the process for domestic entities. The move followed verbal instructions to banks to limit RMB outflows through MNCs’ cash pooling arrangements (See “China Suggests RMB Pooling Changes in the Offing,” June 2, 2016)
“There are a lot of institutions in China that could use money to recapitalize and figure out a way forward from the struggles of the past year or two,” Mr. Egbert said.
Although precise rules have yet to be published, investors will need to obtain RMB through offshore sources, such as the Hong Kong and London offshore clearing centers. Mr. Egbert said although the notice is the latest of several funding programs China has created to facilitate investment in onshore entities, the RQ program is well understood and potentially more flexible than other programs, whether for Chinese state-owned or private companies, or potentially foreign companies with operations in China.
If a company has operations in China, it may want to securitize certain assets, and if domestic investors are not biting, the RQFII increases the pool of available capital and the types of investors,” Mr. Egbert said.
In fact, the RQFII notice appears to give MNCs with finance arms to support product sales, such as car or industrial equipment manufacturers, another way to make investments in China.
“If a company has a finance arm that’s regulated as such in the US that entity would probably qualify as an RQFII,” Mr. Egbert said.