China Cross-Border Report (March 2012)
To say that RQFII hasn’t lived up to the hype would be a generous understatement. Fund managers have found buyers for just half of their RMB20bn worth of quota, a sum only set to increase in 2012. Distribution difficulties have partially thwarted sales attempts while target restrictions have resulted in a bland menu of near-clone products. Add to that marketing efforts directed primarily at retail investors and the program’s limited appeal begins to make sense, despite rapid growth in offshore CNH. Reduced expectations for currency appreciation have widened the cross-border RMB leak even as Beijing’s programs work towards currency liberalization. If RQFII’s debut has taught SAFE anything, it is that plays away from home require skill, experience, and active cooperation with offshore buyers. RQFII’s success may ultimately rely on bringing foreign distributors and manufacturers into the fold.
Most of Beijing’s cross-border efforts are in a state of flux as regulators aim to gradually liberalize both the currency regime and the country’s financial services industry. Time-delaying obstacles to a smooth transition may in fact create more opportunities for offshore groups.
Business from Chinese Investors
China’s high net worth investors appear to be moving away from traditional targets in favor of offshore investments. Noah, for one, has taken note, with aggressive expansion plans to manage HNWI assets in HK – a move that could be replicated by a number of other Chinese distributors.
Overseas Mandates from China
Offshore private equity is unquestionably the checkmate move of early 2012. NCSSF and possibly CIC are both upping their allocations – welcome news for specialist managers hoping to secure substantial long-term mandates. Other major investors may also soon follow their lead.
Investment into China
The QFII program saw a flurry of activity last quarter, with a large number of new licenses awarded in December. As we predicted, SAFE remains intent on preserving QFII’s place as the premier inward investment channel for foreigners and can be counted on to keep the quota tap open.
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