Securities lending to boost foreign participation in A-share market
Further expansion of QFII scheme seen enhancing investment yield for asset managers
1 Dec 2020 | Derrick Hong

Despite escalated tensions between China and the United States, international investors are increasingly drawn into China’s A-share market. And with the recent expansion of the QFII (qualified foreign institutional investor) programme, they can now access a broader range of financial instruments to participate in the country’s equity market.

“We have seen a large number of institutional investors in Europe and the US interested in the expansion of the QFII programme,” Michael Wu, country executive for Greater China at Northern Trust, tells The Asset in an interview. “Regulators are trying to continue to make this QFII programme relevant.”

On September 25, the China Securities Regulatory Commission, the State Administration of Foreign Exchange and the People’s Bank of China issued a circular on the further expansion of the QFII programme. From November 1, according to the circular, foreign institutional investors would be allowed to invest in China depository receipts, stock futures, government-backed bonds, securities lending and repurchase agreements.

Since November, over 20 applicants, including China Merchants Securities (HK), have applied for QFII license. And as of November 13, there are over 32 QFIIs with US$1 billion investment quota and 146 RQFIIs with 1 billion yuan quota. 

While the Stock Connect programme remains the mainstream channel for foreign institutions to access the A-share market, the latest QFII scheme, which allows securities lending, can enhance the investment yield for asset managers and boost A-share trading turnover.

“China has been a long-only market and you cannot do short selling because there is no such tool. This development (securities lending) is a step forward to provide diversified investment tools to the market,” says Wu.

According to the circular, QFIIs can execute securities lending transactions with brokers as counterparties. In the past, only domestic investors and securities firms could do so. 

“With this new QFII regulation, we expect that global brokers and hedge funds can finally play an active role in China’s A-share margin trading and securities financing, while private equity funds can enjoy a low-cost channel to invest in onshore companies with flexible repatriation, and asset owners/asset managers can lend out their securities for higher portfolio yield,” says Ji Yang, Citi’s China head of markets and securities services.

Going forward, market participants, including global custodian banks and international investors, are looking for a more simplified approach to access China markets. Currently, the new QFII scheme still requires foreign investors to open local accounts.

“Existing local regulations require QFIIs to establish a direct contractual relationship with the onshore local custodian. This inevitably prolonged the account opening process as they are unable to leverage the global custody network already made available by their respective global custodians,” says Wu, “This is something we discussed with regulators and at some point, they may think about replicating the global model to provide a more speedy account opening process and to help global investors better manage the timing.”