Global Trustee and Fiduciary Services News and Views Issue 50

Prime, Futures and Securities Services | Financial Services Regulation 94 Building experience of China’s stock markets It is an essential aspect of the progress towards obtaining a full license to offer funds products in China for the fund manager to have demonstrable experience in managing Chinese assets. This can be achieved in a number of different ways. Typically, this could be through the offering of China-invested funds products. In the last few years, access to China’s securities markets has opened up, with schemes such as Stock Connect and Bond Connect, enabling funds to gain direct ownership of securities rather than for them to use access schemes including both the RQFII and the QFII routes and some Exchange Traded Funds. Stock Connect has been highly successful in enabling investors in China to access Hong Kong’s stocks and global investors to access China’s securities via the Hong Kong market. Today there are few restrictions on the scale of business being done, although the choice of which stocks can be accessed remains in place, albeit with more than 450 stocks available. Bond Connect has had a slower start, but has proved to be very popular with a number of global managers seeking the higher yields available from Chinese fixed-income investments. This has been counterbalanced by the currency risk while the Renminbi has fluctuated against the US dollar in recent months. Access to China’s markets has opened up significantly over the last 10 — 15 years, as the below chart demonstrates. This is a constantly evolving theme, and it can be expected that as some of these schemes open further, others may no longer be attractive. Thus, for example, as Stock Connect opens up for global fund managers to buy Mainland China stocks, the need to hold these via QFII or RQFII schemes diminishes. QFII RQFII CIBM QDII/RQDII Objective Enables non-Mainland controlled access to equity and bond. Enables non-Mainland access to RMB-denominated equities and bonds. Enables non-Mainland access to bonds in the China Interbank Bond Market. Enables Mainland access to foreign mutual funds and equities. Year started 2003 2011 2010 2006 Licenses/Quota • 310 Licenses. • Quota ceiling: USD150bn. • Approved to date: USD93.3bn. • 31 countries. • 226 Licenses. • Quota ceiling: RMB1.74tr. • Approved to date: RMB610bn (USD95bn). • Quota per location: 18 locations. • No license/quota restrictions. • Requires registration with PBOC. • 331 overseas institutions. • 334 investment products issued by overseas institutions. • 132 Licenses. • USDD89.993bn quota. • New quota of USD8.34bn granted to 24 applicants from April 2018. Limitations Yes, lock-up periods for all, weekly repatriation for OE funds, 20% monthly repatriation cap. Yes, lock-up periods except for OE funds. No. Yes, longer redemption time. Future development (June 2018) • Remove some restrictions, e.g. lock-up cap, monthly repatriation cap. • Lower application criteria, allow local currency hedge. • Possible merger with RQFII. • Remove the lock-up requirements. • Lower application criteria, allow local currency hedge. • Possible merger with QFII. • Possible further ease of the registration process. • CCDC/SCH to be the withholding agent. • Introduce foreign credit company. • QDII2. • Re-open RQDII. • Revised guidelines to RQDII programme from May 2018. Routes into (and out of) Mainland China