How will QFII, RQFII quota restrictions cancel foreign capital affect the trend of A shares?

 How will QFII, RQFII quota restrictions cancel foreign capital affect the trend of A shares?

Zhu Chaoping, a global market strategist at Morgan Capital Management, told First Financial Journalist that an increase in the proportion of high-quality foreign investment can help promote the concept of value investment and long-term investment and improve the efficiency of resource allocation in A-share market. Chinas capital market is opening up to the outside world at a gradual rate. The foreign exchange bureau has also raised the QFII quota from $150 billion to $300 billion. However, according to the data at the end of August, the quota has not yet been fully used up. Therefore, the opening of the quota should be coordinated with other reforms, such as abolishing or raising the ceiling of foreign capital ownership, otherwise foreign capital will be of high quality public. The inadequate participation of the Division affects the efficiency of market allocation.

By the end of August 2019, a total of 292 QFII institutions had been granted investment quotas of 111.376 billion US dollars; the total amount of RQFII investment was 19.90 billion RMB, a total of 222 RQFII institutions had been granted investment quotas of 69.33 billion RMB.

At the same time, Zhu Chaoping also mentioned that in the past two years, more new increments of foreign capital inflows have come through the interconnection mechanism, but the requirements of each channel are different and can not be adjusted among them. If the integrated investment channels that foreign investors have been calling for can be met, the experience of foreign capital will be enhanced.

Accelerated inflow of foreign capital into A-share Market

Since late August, A-share sentiment has continued to improve, and the trend is expected to continue. Recently, northbound funds continued to return substantially to A shares. As of last week, the total net inflow of funds from Beisheng in that week was nearly 28 billion yuan.

The abolition of QFII and RQFII investment quota restrictions by the foreign exchange bureau is also expected to further boost market sentiment. It will help to facilitate more global investors to invest in the domestic market with RMB, broaden the channels for the use of RMB abroad, and at the same time, increase the attraction of the domestic market to foreign investors. Wu Wen, senior researcher of Jiaobin Financial Research Center, told First Financial Journalist.

Jia Teng told reporters that since this year, the Federal Reserve and several emerging markets have cut interest rates, combined with the previous one-off release of exchange rate risk. Looking at the world, the implicit return rate of Chinese assets has become quite attractive, the return of foreign investment has become a trend, and the liberalization of QFII and RQFII quotas will further accelerate the process.

The acceleration of foreign investment will lead to the failure of many existing domestic strategies that rely on market liquidity manipulation. It is expected that the valuation system will be more scientific and efficient in the future, and the volatility will be lower. Yuhuang Shannan Investment Asset Allocation Advisor Yuan Yuwei told reporters that future exchange rate fluctuations and stock fluctuations will be more relevant.

This year, accelerating the incorporation of international indices into A shares will also accelerate passive capital inflows. The second step of MSCIs expansion into A shares came into effect after the closing of August 27. UBS Securities forecasts that this will bring about a net inflow of passive capital of about $4.5 billion in A shares. The rhythm of active capital inflow will fluctuate with the changes of domestic and international markets and the impact of a series of macro-events such as trade issues. If China further opens up and develops its market, such as allowing stock index futures and other derivatives to be launched in domestic and foreign exchanges, MSCI is expected to open a market consultation to further enhance the A-share weight.

On September 23, S&P Dow Jonesinclusion in A shares will bring about a passive incremental capital of $1.1 billion for A shares. On the same day, FTSE Russells promotion of the A-share inclusion factor came into effect, which will also bring about a passive incremental capital of $4 billion for A-share.

By the end of the second quarter of 2019, the value of foreign investorsA shares in the stock market was 1.65 trillion yuan, up 43% from the end of 2018, accounting for 3.1% and 7.5% of the total domestic market value and the free circulation market value, respectively.

Consumption and finance sectors will benefit from a long-term focus on science and technology

As far as the specific impact of foreign capital inflows on A shares is concerned, Jiateng said that consumption and finance sector will remain the core allocation direction of foreign capital.

However, foreign capital is not blindly allocating the consumption sector, but more concerned about core assets, such as Maotai, Gree and so on.

As far as finance is concerned, there are concerns that LPR reform and downward trend of interest rate will squeeze the net interest margin of banks in the near future. However, BNP Paribas research shows that since June, the allocation of funds northward mainly matches the plate weight of MSCI China A-share index, so the proportion of Finance and consumption is still large.

In addition, the trend of technological upgrading will be the most important trend in the next few years. Xu Tao believes that China will also accelerate its upgrading to a higher-end supply chain under external pressure. 5G applications are all concepts that need to be paid attention to in the future. New core assets may emerge in the fields of chips, semiconductors and mid-high-end manufacturing industries. Foreign capital will focus on such core assets. The layout of assets is just beginning.

Improving the Open Quality is the Key

In addition to the openness of quotas, the quality of openness has attracted much attention from all walks of life.

Wu Wen said that at present the quota of QFII/RQFII approval has not been exhausted, and the improvement of investment convenience is only the first step to attract foreign investment, but also needs the continuous improvement of the system and the corresponding basic support.

QFII fund manager, a large foreign capital management institution in Singapore, told reporters that in recent years, the new increase in foreign capital allocation of A shares has been more through the channel of Shanghai and Hong Kong Tong, mainly because the channel is more convenient. Foreign capital invested in A shares through QFII needs to be filed, and funds must be hosted in China, and capital remittance needs to be levied. Capital gains tax, and interconnection mechanism is not required.

However, QFII/RQFII and interconnection channels will be more complementary to foreign investment, such as the Shanghai-Hong Kong Stock Exchange can not be new, in addition, if it is a hedging strategy, foreign investment must come through QFII, so the Shanghai-Hong Kong Stock Exchange can not flexibly use derivatives. Yuan Yuwei told reporters.

In this regard, Zhu Chaoping mentioned that in the future, we can integrate and simplify the channels of A-share investment, which will further facilitate foreign investment in Chinas stock market.

For example, in the bond market, foreign investment institutions have reflected more progress in the integration of investment channels. At present, there are three channels for foreign institutions to invest in the domestic bond market: direct participation in the inter-bank market through domestic agency clearing agents, investment through QFII/RQFII, and bond links. However, the requirements of each channel are different, and can not be adjusted between them. In July this year, the central bank has issued a draft soliciting opinions on clearing agent and QFII, RQFII channels allowing warehousing and channel integration, and has now completed public solicitation of opinions.

In addition, Zhu Chaoping also mentioned that improving the quality of opening up also includes abolishing or raising the ceiling of foreign ownership (30%). Previously, some stocks faced the risk of touching the upper limit of shareholding with the increase of foreign shareholding, which also caused concerns of overseas investors. In March, foreign investors once bought big lasers and the stock was excluded from the MSCI China Stock Index.

We also keep in touch with the regulators. It is a common phenomenon in emerging markets to set a cap on shareholding, not to mention whether to raise the cap, but to improve transparency and disclose the proportion of shareholding in advance. At present, when the proportion of shareholding reaches 26%, the exchange will disclose it. At this time, it is only a step away from the 30% cap, which may lead to investors having no time to prepare beforehand. Wei Zhen, head of China research at MSCI, previously told First Financial Journalist.

Source: First Financial Responsibility Editor: Guo Chenqi_NBJ9931