Chinese one-hundred yuan banknotes are arranged for a photograph in Hong Kong, China, on Dec 26, 2012. (JEROME FAVRE / BLOOMBERG)
Foreign-investor sentiment towards the renminbi and Chinese mainland onshore markets is at its most bullish level in three years despite the recent yuan slump and asset-price rout, a survey by Standard Chartered has found.
The slew of access channels mainland regulators have opened and greater clarity on rules have led foreign investors to take a long-term, strategic view towards betting on mainland prospects, the survey shows.
The newly released 2018 Standard Chartered RMB Investors Forum Survey, which gathered responses from more than 180 investors, regulators and custodians in Asia, Europe and North America in March, revealed that 88 percent of respondents are currently investing in the mainland, up from 69 percent last year; the percentage of those planning to grow their mainland investment also increased notably to 76 percent compared with 69 percent one year earlier.
“It’s all down to simplicity in regulation. Previously on the China Interbank Bond Market (CIBM) direct scheme, the application process was more complex and took longer time. One of the attractions now, say in bond connect for example, is that foreign investors know if they want to invest in China in less than four weeks’ time, that’s achievable,” said James O’Sullivan, head of securities services in Standard Chartered’s Hong Kong office.
Funds shrug off recent volatility and take long-term view as regulations ease and access channels multiply
Regulators’ unrelenting push towards liberalization and deregulation have put many more access channels for foreign investors, from the oldest schemes – Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor – to the recently launched stock connect, bond connect, MSCI emerging market index inclusion, to the much anticipated Shanghai-London trading link and potential inclusion of Bloomberg Barclays Global Aggregate Index. Foreign investors are taking a very bullish stance on RMB assets and onshore markets despite short-term volatility.
More than 76 percent of respondents cited new access channels as having the biggest influence on the decision to increase mainland investment, up from just 25 percent last year; the factor is even more powerful than market condition, which only comes at third place after index inclusion on the list of factors weighing on foreign investors’ decision making.
Celebrating one year from the inception of bond connect in July last year, latest data from Bond Connect Co showed that as of last month 365 investors had registered with the scheme; average daily turnover reached 6.55 billion yuan (US$987 million) last month, almost double the average daily turnover of 3.43 billion yuan in the first half of this year.
“That’s a tremendous number for a scheme of one year old,” said O’Sullivan.
Apart from easier access, clarity on rules has also prompted more foreign participation.
“If you look at the roadmap the regulator has rolled out with bond connect, with tax clarification, with real-time delivery versus payment, these aspects are going to stimulate more and more investment into China,” said O’Sullivan. Many European clients he spoke to are very interested in investing through the scheme, he added. The head estimated that the number of registered investors could easily pass 1,000 by this time next year.
Stock connect and bond connect have become the core investment channels, with 48 percent of respondents planning to use stock connect for future investment and 23 percent of them planning to use bond connect, the survey finds.
The growing popularity of connect schemes does not mean older access channels such as QFII and RQFII are less meaningful for foreign investors, O’Sullivan said.
“All the schemes are relevant and complementary, there will always be a reason why you want to use QFII or RQFII. With the oldest quota schemes, there is a broad investment scope, foreign investors also want to have a direct connect with the Chinese regulators and develop and maintain a relationship with them.”
Rules on the conventional quota schemes have also been eased. On June 12 the People’s Bank of China and State Administration of Foreign Exchange jointly issued a provision to liberalize capital repatriation and allow yuan hedging for QFII and RQFII.
The three-month lock up period on repatriation of principal has been removed, a 20 percent cap on the amount of capital that QFII program users can remit out of the country as a percentage of their domestic assets has also been scrapped.
North America has emerged as the most positive region on the onshore market outlook, with 78 percent of respondents investing in the mainland and 80 percent saying they expected to increase the amount this year.
Yet not all key regions are convinced by the mainland’s easier regulation. While 79 percent of European correspondents said they are currently investing in China, only 76 percent are willing to increase investment this year.
The lukewarm reaction is partly brought by new Undertakings for Collective Investment in Transferable Securities (UCITS) rules in the continent; European investors need to stall investment until everything is clear to keep their funds UCITS-compliant, the bank said.