A shortage of quotas under the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme will adversely impact the growth of the exchange traded funds (ETF) business amid the expansion of global funds seeking to invest in China. Such a dearth of quotas will heavily weigh on Hong Kong -- the biggest beneficiary of the scheme.

"All RQFII ETFs listed in Hong Kong, US and Europe use Hong Kong-based investment managers," according to Marco Montanari, managing director at Deutsche Asset & Wealth Management. He is the head of passive asset management, Asia-Pacific, in charge of the company's exchange-traded fund (ETF) business. "They all use Hong Kong quota, so this means that this shortage of quota is affecting all ETFs listed globally."

The RQFII scheme, launched in 2011, allows foreign institutional investors to invest their offshore renminbi in A-shares of Chinese companies. Eighty institutions in the city have been granted RQFII quota so far, according to China's State Administration of Foreign Exchange (SAFE). More than 265 billion renminbi (US$43.18 billion) out of the total quota, which currently stands at 270 billion renminbi, have been allocated by the end of August 2014, SAFE data showed.

The city's RQFII quota will likely be raised again, but the increase isn't imminent. Montanari noted it was difficult to forecast if the increase of quota for Hong Kong will take place before the launch of the Shanghai-Hong Kong Stock Connect on October 13. The initiative, will give Hong Kong-based investors access to A-shares listed on the Shanghai Stock Exchange and those based in Shanghai - access to Hong Kong shares. "Shanghai-Hong Kong Stock Connect is a big focus for the authorities," he added.

It remains to be seen if Shanghai-Hong Kong Stock Connect will help asset managers expand their access to the Chinese market, while bypassing the RQFII quota. The scheme will carry its own daily quota of trades and this may make it difficult for managers to execute trades.

"What I can say is that the demand is there," commented Montanari. "If you look at the US and European ETF market, less than 3% of the assets are exposed to China, so the potential is huge." It would help to have another increase of 200 billion renminbi, like that in November 2013, he said.

It is a good sign that RQFII quotas are being allocated, not just to Hong Kong but also France, Germany, Korea, Singapore and the UK, he observed. The scheme, together with Shanghai-Hong Kong Stock Connect shows "the will of the Chinese authorities to open further their market".