Banks give back China investment quotas as clients bypass the middlemen

Sat Jan 16, 2016 10:11pm EST
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By Michelle Price

HONG KONG (Reuters) - Global banks have started to hand back investment quotas used to buy Chinese stocks and bonds because alternative channels for investment in China and the sliding yuan are making this once lucrative business unprofitable.

While China's move to open up its capital markets and allow its currency to trade more freely has created opportunities for global banks, these developments are also threatening to kill off niches where they have acted as middlemen to give previously excluded foreign investors backdoor access to the mainland.

Several banks, including Barclays (BARC.L: Quote), Commerzbank (CBKG.DE: Quote), Norway's SEB (SEBa.ST: Quote) and the Netherlands' ING ING.AS, handed back just over $800 million in quota granted by Chinese authorities under the Qualified Foreign Institutional Investor (QFII) scheme between April and September 2015, public data shows.

Other banks are considering following suit, according to individuals familiar with the discussions.

The move does not reflect a waning appetite for investment in China, however, despite its slowing economy; overall quotas for QFII have quadrupled to about $81 billion since 2010.

But banks' share of the quotas, which they repackage into derivatives such as p-notes and sell on to investors who don't have access to Chinese markets, a practice known as quota renting, has dwindled to just 14 percent from 37 percent over that period.

That means more foreign investors such as asset managers and index funds, the biggest users of such products, have access to China through QFII or new alternative avenues for investment such as the Hong Kong Shanghai Stock Connect scheme and the more flexible yuan-denominated RQFII - so fewer need the banks as go-between.

"Renting quota allocations is a dying business due to the access available through Stock Connect," said Brendan Ahern, chief investment officer of New York-headquartered KraneShares, which runs an exchange-traded fund for mainland shares.   Continued...

A staffer walks into the Hong Kong Stock Exchange in Hong Kong in this October 28, 2014 file photo. REUTERS/Bobby Yip/Files