China’s A-Share Market
When China’s equity market opened in 1990, only domestic investors could purchase A-Shares. That changed in 2002 when foreigners were granted A-Share access through the Qualified Foreign Institutional Investor (QFII) scheme. Further market loosening came in 2011 with launch of the Renminbi Qualified Foreign Institutional Investor (RQFII) program. More recently, the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect schemes were developed to give mutual market access to onshore and offshore investors.
Qualified Foreign Institutional Investor ("QFII")
The Qualified Foreign Institutional Investor (QFII) scheme was introduced in 2002 to allow foreign investors access to mainland China’s markets. Institutional investors that meet strict thresholds regarding assets under management and years of investment experience can apply for the QFII title and a quota allocation.
Two Chinese regulators work together to bestow investment privileges. The Chinese Securities Regulatory Commission (CSRC) grants “QFII” status. The State Administration of Foreign Exchange (SAFE) manages foreign exchange reserves and assigns the quota.
Although the QFII regime was a major milestone in liberalizing China’s markets, it was limited in several respects. Through the scheme, investors could only access China’s equities market, exchange-traded bond market and money market funds. Investors were also subject to various lock-up provisions and repatriation restriction.
Renminbi Qualified Foreign Institutional Investor ("RQFII")
The Renminbi Qualified Foreign Institutional Investor (“RQFII”) scheme was launched in 2011 as a revision and expansion of QFII.
RQFII permits access to a wider range products include equities, fixed income, mutual funds, stock index futures, and the Interbank bond market. The scheme enables redemption of 100% of principal and gains on a daily basis and removes lockup periods.
Whereas USD is the main currency used in the QFII program, RQFII uses Renminbi (RMB) denominated assets. In practical terms, this RMB-reliance expands RMB denominated products available offshore and marks a critical step in the eventual convergence of the offshore and onshore RMB markets (explained in a later section).
Initially, only Hong Kong-based subsidiaries of Chinese financial institutions could participate. The program was later extended to a wider range of financial institutions in Hong Kong, as well as those in Singapore, Taiwan, Luxembourg, UK, France, Germany, Canada, the U.S., etc.
Hong Kong Stock Connect Schemes
In addition to QFII and RQFII schemes, foreign investors can also access eligible shares through the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect schemes. Launched in Shanghai in 2014 and expanded in Shenzhen in late 2016, the schemes permits mutual market access between onshore and offshore investors. In other words, investors can easily trade shares on the other market using their local brokers and clearing houses.
Shanghai-Hong Kong Stock Connect
The Shanghai-Hong Kong Stock Connect scheme came first, launching in 2014. It offers a convenient way for foreign investors to purchase Mainland shares without opening an account in China. Roughly 900 out of a possible 1800 securities are eligible for participation in the scheme.
The scheme comes with additional restriction. Trading under Shanghai-Hong Kong Stock Connect is subject to Daily Quota limitations, meaning that only a certain number of shares can be bought and sold each day.
Shenzhen-Hong Kong Stock Connect
The Shenzhen-Hong Kong Stock Connect scheme is a more recent addition, launching in December 2016. The scheme enables investors in Hong Kong to buy stocks listed on Shenzhen’s exchange, while allowing mainland investors to access shares in Hong Kong.
Since launch of the Shenzhen program, investors can access 1448 China A-Share names through the two schemes, representing 80% of total market capitalization. The chart below summarizes the differences among the two schemes:
|Shanghai-Hong Kong Stock Connect||Shenzhen-Hong-Kong Stock Connect|
|Launched||November 2014||December 2016|
|Eligible Stock Universe - Northbound||568 stock. SSE 180 Index and SSE 380 Index, plus A/H dual listed names on the SZ Stock Exchange||880 stocks. SZSE Component Index (399001) and the SZSE Small mid-Cap Innovation Index (399015) with at least Rmb6b market cap, plus A/H dual listed names on the SZ Stock Exchange|
|Eligible Stock Universe - Southbound||318 stocks. Hang Seng Large-cap Index and Hang Seng Mid-cap Index, plus A/H dual listed stocks on the HK Exchange||417 stocks. Hang Seng Large-cap index, Hang Seng Mid-cap Index, and Hang Seng Small-cap Index (with at least HK$5b market cap), plus A/H dual listed stocks on the HK Exchange|
|Aggregate Quota - Northbound||None. Abolished as of August 16, 2016. Was RMB 300 billion||None|
|Aggregate Quota - Southbound||None. Abolished as of August 16, 2016. Was RMB 250 billion||None|
|Daily Quota - Northbound||RMB 13 billion||RMB 13 billion|
|Daily Quota - Southbound||RMB 10.5 billion||RMB 10.5 billion|
Source: Shanghai Stock Exchange, Shenzhen Stock Exchange, Hong Kong Stock Exchange