Article from Reuters
Tue Jan 10, 2012 11:06pm EST
* Slowing economy, higher interest rates to lift demand
* Institutional demand seen limited by economic concerns
* Demand unlikely to hurt growth of offshore yuan market
By Saikat Chatterjee and Michelle Chen
HONG KONG, Jan 11 (Reuters) - Money managers are hastening to offer new products after China unveiled a long-awaited plan to allow offshore investors to place a portion of their offshore yuan deposits in the mainland.
Following two rounds of quotas being awarded by China's State Administration of Foreign Exchange to investment firms in Hong Kong under its Renminbi Qualified Foreign Institutional Investor scheme since December, funds have scrambled to launch investment products in the former British colony.
The RQFII scheme, also called mini-QFII, was one of a series of measures announced by Vice-Premier Li Keqiang during an August 2011 trip to Hong Kong, and allows investors to buy mainland stocks and bonds in yuan under a quota.
Guotai Junan International, China Universal Asset Management and E Fund (Hong Kong), a unit of China's second-biggest fund manager, are some of the fund houses marketing products to investors in Hong Kong sitting on low-yielding yuan deposits.
"This is a much appreciated policy and boosts support for Hong Kong's premier role as a offshore yuan center," said Charles Wang, chief executive of E Fund Management in Hong Kong, which received a 1.1 billion yuan ($174.2 million) quota under the scheme.
Wang said relatively higher mainland interest rates, a slowing economy, an intact yuan appreciation trend, and active portfolio management were generating demand for his fund, which, like most of its counterparts, is invested mainly in fixed-income instruments.
While a thriving offshore yuan bond market has taken root in Hong Kong since late 2010, yuan-hungry investors have had to grapple with low bond yields and diminishing expectations of renminbi gains.
In 2011, an index of so-called "dim sum" bonds tracked by Bank of China Hong Kong fell nearly 4 percent, while CCDC's composite index on the mainland gained more than 5 percent. Comparatively, key stock indexes in Hong Kong and on the mainland declined 20 percent in 2011.
The drop in returns reduced the appeal of yuan-linked assets among foreign investors and threatened to slow China's drive to make the renminbi an international trade settlement currency.
This prompted Beijing to launch its RQFII scheme, under which offshore funds can launch 80 percent in bonds and 20 percent in equities subject to an overall cap of 20 billion yuan, providing investors with a conduit to invest their yuan funds in the mainland.
Sheldon Gao, president of China Universal Asset Management in Hong Kong, said nearly 95 percent of its 1.1 billion yuan RQFII fund would be invested in the bond market as stock prices were likely to remain under pressure in the first half.
Others, such as Guotai Junan International, are pursuing a more aggressive strategy. It plans to focus on high-yield bonds and expects returns of about 6.5-8 percent from this sector while average returns are expected to be between 4.5 and 6.5 percent.
EATING CRABS
Despite the broad enthusiasm sweeping fund houses in Hong Kong, fund managers caution that institutional investors could be slow to invest under the scheme as broad concerns over the outlook for the Chinese economy remain and the quotas are tiny.
China Universal's Gao said the first batch of RQFII products would mainly be bought by retail investors, while "institutional investors would not be the first to eat crabs", referring to a Chinese phrase not to rush into trying a new thing.
"Global investors have been reducing their positions in emerging markets and are not likely to add to positions in China under these circumstances," Gao said.
Still, fund managers are optimistic about quotas being increased in coming months, depending upon the success of the pilot scheme.
Total quotas awarded to funds is capped at a tiny 20 billion yuan, representing about 3 percent of the about 630 billion yuan deposited in Hong Kong banks.
"Hong Kong's role as a financial centre hinges on China and if you don't have a conduit for money to flow back into the mainland, there's no incentive for investors to convert their money into yuan," said E Fund's Wang. ($1 = 6.3150 Chinese yuan) (Editing by Chris Lewis)
Article from Reuters