FINANCIAL HUB: Hong Kong Exchanges and Clearing Ltd. extended its business hours in 2011 to keep closer ties with mainland markets (CHEN XIAOWEI)

The renminbi qualified foreign institutional investor program, known as RQFII, has established a new mechanism for the backflow of overseas yuan funds.

The China Securities Regulatory Commission (CSRC), the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly issued rules for the pilot program of RQFII on December 16, 2011, giving a green light to qualified Hong Kong subsidiaries of fund management companies and securities companies to use yuan funds raised in Hong Kong to directly invest in the mainland bond and equity markets through the RQFII quota.

An analysis report of the Research Center of the Investment Bank Department of the Industrial and Commercial Bank of China said to enhance the status of the yuan in the international market, it is of great significance to set up two mechanisms—one is allowing the yuan to circulate in the overseas market, and the other is the backflow.

The creation of the RQFII is an important step forward for the internationalization of the Chinese currency, said the report.

The RQFII is also an important link connecting the mainland and Hong Kong capital markets, and is a channel for cooperation between the two markets.

Tian Yong, an analyst with CASH Financial Services Group, said the RQFII might make the Chinese currency more attractive to overseas holders.

Trial launch

The pilot program of RQFII is proceeding as planned. The SAFE on January 30 disclosed a document concerning the distribution of RQFII quotas.

Nine fund management companies and 12 securities companies, all based in Hong Kong, shared the preliminary 20-billion-yuan ($3.05-billion) quota.

To ensure the sound proceeding of the program, the authorities chose to start with Hong Kong subsidiaries of fund management companies and securities companies which are supposed to be more familiar with the mainland capital market.

According to the program, to control risks, qualified investors should invest no less than 80 percent of the yuan funds they raised in fixed-income securities, while investment in stocks and equity funds should account for no more than 20 percent.

It is estimated that after one to three months, overseas yuan funds will be able to invest in the mainland securities market.

After getting the RQFII quota, some fund management companies have reported their plans for designing the products.

The first RQFII product is called RMB Bondplus Fund, and will be raised and operated by the China Universal Asset Management Co. Ltd. It will be distributed through major banks in Hong Kong. Its initial offering price is 10 yuan ($1.53) per unit and subscription fee charges are up to 5 percent. Retail investors can subscribe to Class A shares with an initial subscription amount of 10,000 yuan ($1,530), and that of an institutional investor is 3 million yuan ($458,000).

The supervision of the RQFII will be very strict as it is a new financial business for China.

According to the rules, the CSRC is responsible for overseeing the securities investment activities of the pilot institutions, the central bank—the PBOC—manages the RQFIIs' renminbi bank accounts opened on the mainland, SAFE controls the investment quota, and the PBOC and SAFE jointly monitor and manage the inflow and outflow of capital.

New channel

RQFII is conducive to increasing the yield of overseas yuan funds, said analysts.

Li Xunlei, chief economist with Guotai Junan Securities, said the yield of overseas yuan funds in Hong Kong is very low. The deposit interest rate of the yuan is around 0.6-0.7 percent. The yield of other overseas yuan-denominated bond funds is about 1-2 percent.

Compared with the low yield in overseas markets, the one-year deposit interest rate on the mainland stands as high as 3.5 percent. Li said the RQFII is sure to bring more benefit for yuan investors in Hong Kong.

More importantly, as Hong Kong is a major international financial center, overseas investors can invest in the Chinese mainland capital market through the RQFII.

The new rules said the RQFII can invest in inter-bank bond markets, while under the previous qualified foreign institutional investor (QFII) program, QFIIs were not allowed to invest in domestic inter-bank bond markets.

The new rules make the RQFII more attractive to overseas capital, as overseas yuan holders can participate in the mainland financial market to get higher returns.