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Chinese Firms Raising Yuan Mutual Funds in Hong Kong

Hong Kong has seen the launch of the first of a new batch of renminbi-denominated mutual funds approved by the Chinese government.

Chinese New Year officially ends this week, but for Hong Kong–based Charles Wang, chief executive officer of Chinese asset manager E Fund Management (HK), the weeklong holiday was not restful at all.

That is because he and his team have been busy preparing for the coming launch of a 1.1 billon yuan fund, which will be among the first batch of renminbi-denominated mutual funds approved by the Chinese government to be raised in Hong Kong.

With the new fund raisings, E Fund’s assets under management double to nearly $400 million, which is not bad considering that the Guangzhou-based asset manager set up shop in Hong Kong in 2008. “We see explosive growth in the coming few years,” Wang says, adding that the experiment, also known as RMB Qualified Foreign Institutional Investor scheme (RQFII), likely will be expanded with more quotas given later this year.

E Fund is among a group of 21 mainland fund managers and brokers that are kick-starting a Chinese-government experiment allowing Chinese financial services companies to raise yuan funds in Hong Kong for investing in mainland markets.

The scheme is the latest addition to China’s renminbi internationalization efforts. Chinese authorities have approved the 21 firms to raise a combined 20 billion yuan in Hong Kong.

The launch of the new RQFII mutual funds comes only a few months after Chinese Vice Premier Li Keqiang announced the program during a speech at the University of Hong Kong in August.

Hong Kong’s offshore RMB market is likely to heat up this year. Officials from China Securities Regulatory Commission announced at the Asian Financial Forum held in Hong Kong in mid-January that they would be encouraging Chinese companies to begin seeking yuan-denominated initial public offerings in Hong Kong as well.

“Hong Kong is an axis of capital,” E Fund’s Wang says, adding his RQFII mutual fund will have a fixed-income theme, investing primarily in Chinese corporate and government bonds. “Many global players want access to capital — to Chinese capital. Chinese financial players want access to global capital. Hong Kong offers a competitive platform for Chinese asset managers as well as global players.”

Demand in Hong Kong for exposure to Chinese bonds and equities comes despite the fact that China’s CSI 300 index fell 16 percent in 2011, the result of the government’s efforts to cool the economy and to prevent speculative investments, particularly in real estate.

Despite fears of a “hard landing,” Chinese authorities announced on January 17 that the country’s GDP grew 9.2 percent in 2011, down from 10.4 percent a year earlier, which is not bad considering that most developed markets did not grow at all and are on cusp of falling into recession again. China, most economists believe, will slow down in 2012 but still will maintain a minimum of 8 percent GDP growth.

At the center of Hong Kong’s optimism is China’s will to make the city its primary offshore RMB trading center.  This gives local banks the opportunity to offer all kinds of RMB-linked products, including RMB-denominated bonds and funds, which is proving to be an attractive investment option for global asset managers. China’s experiment is leading to the introduction of all kinds of new investment instruments in Hong Kong aimed at both China-based and global asset managers.

For example, Renminbi bond issues — also known as dimsum bond issues — topped 100 billion yuan in 2011, almost three times the 36 billion yuan in 2010; and bank deposits topped 600 billion yuan, up from 259 billion yuan at the beginning of 2011, according to the Hong Kong Monetary Authority.

Even though China is now the second-largest economy in world, it remains difficult to invest in China’s capital markets as the government has restricted access by limiting global asset managers to quotas known as Qualified Foreign Institutional Investor schemes, or QFII. 

So far, only 135 QFII licenses have been handed out with funds totaling $21.6 billion, less than 1 percent of the market cap of China’s stock markets, according to Shanghai-based research house Z-Ben Advisors. In a move to show that they are loosening up, however, Chinese authorities handed out 14 QFII licenses in December alone, equivalent to the total number handed out in the previous 11 months.

China is also allowing more of its own financial services companies to expand operations in Hong Kong. So far, there are ten Chinese asset managers with operations in Hong Kong, and three more are on the way as they only recently received regulatory approval from mainland authorities, says Tony Skriba, an analyst with Z-Ben Advisors. A total of 15 Chinese brokerages also have set up subsidiaries in Hong Kong.

A total of 29 mainland brokers and asset managers have been granted licenses by authorities to set up “Qualified Domestic Institutional Investor” funds (QDII) in Hong Kong, which allow them to raise capital from mainland Chinese investors to buy Hong Kong equities.

“Despite rapid development and improvement of onshore financial markets, many Chinese firms feel they are unable to gain global experience unless they head to Hong Kong,” Skriba says. “Hong Kong is also close enough to their comfort zone — at least in investment expertise — that it makes a natural first step,” says Skriba, adding that most Chinese brokers and asset managers still specialize in offering China-themed products to global investors through H-shares.

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