Firms that move early into running renminbi-denominated exchange traded funds under China’s Renminbi Qualified Foreign Institutional Investor quotas will gain a strong edge over rivals, and improve their credit strength, Moody’s Investor Service says.

Firms that move early into running renminbi-denominated exchange traded funds under China’s Renminbi Qualified Foreign Institutional Investor quotas will gain a strong edge over rivals, and improve their credit strength, Moody’s Investor Service says.

Since the RQFII regime was create a few years ago, managers have used the programme to create the first China ETFs so they can track A-shares of Chinese companies, and do so in a market often far more flexible and liquid than would otherwise be the case for foreigners.

Early moves into the space include Deutsche Asset Management; Blackrock; Harvest Global Investments; Van Eck; China AMC; Invesco and KraneShares, the ratings agency said.

“This new avenue into Chinese A-shares is credit-positive for the early movers into this product class, particularly those firms targeting investors located outside of Asia when raising assets for RFQII ETFs,” the ratings agency said.

Prior to the present decade, China’s capital markets were almost entirely closed to non-domestic investors but that situation is changing rapidly: the Mainland is moving to create, for example, a “through-train stock market link connecting Hong Kong and Shanghai.  

In 2012, the Chinese authorities approved new RFQII quotas for asset managers to issue ETFs denominated in the renminbi to track A-share. Previoiusly, unqualified foreign investors could only gain indirect exposure to A-shares through derivatives or buy borrowing a QFII quotas, which could be expensive. Such funds could trade at a large premium to net asset value when demand for A-shares was strong. The development of an ETF market largely eliminates this problem, Moody’s said.

Moody’s said managers that use these instruments will be able to broaden out beyond equities to areas such as fixed income and money market funds. Managers based in China will be able to market US and European investment products to Chinese clients.

The rating agency also expects that liberalisation moves will mean that the lag in performance between Chinese GDP growth and that of the stock market should erode in time; as of 2013, there was a gap of 12.2 per cent – the widest of any major country – between China’s 10-year nominal GDP compound annual growth rate and the CAGR of the Shanghai Stock Exchange Composite index over the same period.