China’s qualified foreign institutional investor (QFII) and renminbi qualified foreign institutional investor (RQFII) schemes will still have roles to play despite the launch of the Shanghai-Hong Kong Stock Connect, PricewaterhouseCoopers (PwC) said.
Florence Yip, Asia Pacific financial services tax leader at PwC, said the cross-border stock trading link will give foreign investors more opportunities to invest in China’s capital markets, but it cannot replace QFII and RQFII as yet.
“Under QFII, we have US$150 billion quota, and under RQFII, we have 270 billion yuan (US$44 billion), while the Stock Connect only has 300 billion yuan. If RQFII and QFII holders quit and take part in the Shanghai-Hong Kong Stock Connect, they may not have enough quotas,” Yip said.
“In the future, when the RMB becomes a fully convertible hard currency, then maybe there will be no need for RQFII and QFII,” she added.
Albert Lo, partner in consulting at PwC, said participants in the QFII and RQFII programs can access a wide range of investment products, while investors in Stock Connect can only invest in 568 stocks in the mainland.
“Potentially, in the short term, you may see a switch of people using RQFII and QFII into products other than equity, whereas they have the Stock Connect channel to purchase equities,” Lo said.
On the third day of the Stock Connect program, which is also known as “through-train”, the response of investors from both markets has become even more tepid than in the previous two. About 80 percent of the mainland-bound daily quota of 13 billion yuan remained unused, while about 98 percent of southbound quota of 10.5 billion yuan was still available at the end of Wednesday’s trading session. CLSA has now dubbed the scheme “Ghost Train”.
But Yip said the market is still getting used to the scheme as it was launched just this Monday. She also noted that many clients she talked to in the past few days were enthusiastic about the program.
In a bid to boost the stock trading scheme, mainland regulators announced last week that foreign investors buying A shares will be “temporarily” exempt from the 10 percent capital gains tax. Institutions already investing in Chinese markets under the QFII and RQFII programs are also entitled to the waiver.
On the other hand, mainland individuals buying Hong Kong shares would be spared the levy for three years.
There was no mention of when the tax exemption will end, which is good news for Hong Kong and foreign investors, Yip said.
It is possible that the tax break will last more than three years as there were cases when tax payment was suspended for over 10 years, she added.
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