China Considers Easing Rule on RQFII Investment in Bonds

China may relax or abolish a rule that requires Renminbi Qualified Foreign Institutional Investors to keep most of their funds in bonds, according to the Hong Kong Monetary Authority, a move that may boost demand for stocks.

Shares of Chinese brokerages traded on the mainland surged today on speculation the new rules will increase stockbroking income, with GF Securities Co. and Sealand Securities Co. rising by the 10 percent daily limit. The first batch of yuan QFII funds, approved in December 2011 with a 20 billion-yuan quota, are required to invest at least 80 percent of their assets in bonds, with the rest going into equities or kept as cash.

China Securities Regulatory Commission Chairman Guo Shuqing has cut trading fees, pushed companies to increase dividends and allowed trust companies to buy equities since taking over a year ago, in an effort to shore up China’s stock market. The benchmark Shanghai Composite Index is headed for its third straight year of declines.

“Our delegates would like to see some flexibility in this split so that investors will have more choices,” Norman Chan, chief executive of Hong Kong’s de facto central bank, told reporters in Beijing yesterday after meeting Guo. “We’d like to abolish or relax this proportion requirement. Chairman Guo has expressed that he agrees and supports our suggestions.”

The Shanghai Composite has lost 2.2 percent this year, while the MSCI China Index of mostly Hong Kong-traded shares, open to overseas investors, has gained 17 percent as U.S. bond purchases spurred foreign funds to pour money into emerging markets.

‘Losing Confidence’

“The relaxation will be positive for China’s stock market as mainland investors are losing confidence and are reluctant to buy stocks now,” Francis Lun, Hong-Kong based managing director at Lyncean Securities Ltd, said by telephone today. “Foreign entities still account for only a couple of percent of the Chinese capital market.”

Shares of Citic Securities Co. (600030), China’s largest brokerage by market value rose 4.8 percent to close at HK$16.74 in Hong Kong trading today. Haitong Securities Co. advanced 6.8 percent to HK$11.38.

China may also expand the RQFII program, which now is open only to Hong Kong units of Chinese financial companies, to include institutions based in the city, Chan said. Guo supports opening the program to all types of Hong Kong-based financial institutions, Chan said.

Competition Intensifies

Hong Kong’s biggest banks have been lobbying China to relax restrictions on yuan businesses in the city as competition from London, Singapore and Taiwan intensifies. The city remains the largest offshore yuan center, with deposits in the currency climbing more than 27-fold in five years to a record 627.3 billion yuan ($101 billion) in November 2011, monetary authority data showed.

“Guo has showed that he agrees and supports the relaxation” of investment rules, Chan said. “This is Chairman Guo’s view and it still needs to be studied by other government offices. They are discussing the issue and hopefully there will be results soon.”

In April, China announced a second, 50 billion-yuan RQFII quota specifically for the creation of exchange-traded funds that invest in the domestic A-share stock market. The CSRC, in its April announcement, didn’t impose any regulations on how much had to be invested in bonds for this second quota.

China’s securities regulator will be “flexible” about expanding the RQFII program, Chan said. China has agreed in principle to increase the total 70 billion-yuan quota by 200 billion yuan, Guo said last month.

While the yuan is freely convertible for trade, investors from Hong Kong or from overseas may buy stocks or bonds in China only with quotas assigned by the government, and direct investments need regulatory approval.

To contact the reporter on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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