China will curb expansion of a program for local investors to buy stocks and bonds overseas until markets recover, according to the joint-venture funds of Credit Suisse Group AG and Prudential Financial Inc.
Qualified domestic institutional investor, or QDII, licenses will be difficult to obtain until regulators are convinced international markets have stabilized, said Thomas Kwan, the director of fixed-income at ICBC Credit Suisse Asset Management Co. in Beijing. MSCI’s global stock index is down 34 percent in the past two years, while U.S. Treasuries delivered gains of only 4 percent to yuan-based investors in the same period, according to Merrill Lynch & Co.
China had granted licenses to 50 companies to invest as much as $64.5 billion in international assets by the end of 2007, according to the latest government data. The program is designed to reduce currency reserves and ease pressure on the yuan to strengthen. The only licenses approved in the past year have been for “segregated accounts” aimed at wealthy individuals or institutions, limiting losses for retail investors, Kwan said.
“More important for them at the moment is to protect the investors, and this objective comes ahead of the currency,” said Kwan, whose company manages 75.2 billion yuan ($11 billion) in assets. “The regulator will let the money go out again when they think the market is safe.”
‘Orderly’ Process
The State Administration of Foreign Exchange has “adhered to the principle of controlling risks and opening up in an orderly manner when approving QDII quota,” the currency regulator said in a faxed statement to Bloomberg News today. Among companies granted the biggest QDII quotas were Ping An Insurance (Group) Co. and China Asset Management Co., according to the latest data from SAFE, released Dec. 31, 2007.
China first permitted financial institutions to invest overseas under the QDII program in April 2006. China Minsheng Banking Corp., the nation’s first privately owned bank, dissolved its overseas investment fund in March 2008 after it lost more than 50 percent during the global credit crisis.
“At the first stage, QDII funds didn’t achieve the goal the government wanted,” said James Yuan, chief investment officer at Everbright Pramerica Fund Management Co., which helps oversee 36 billion yuan in assets. The company has yet to receive approval after seeking a QDII quota in May, he said.
September Approvals?
The Shanghai-based company is a venture between Prudential Financial, the second-largest U.S. life insurer, and Everbright Securities Co. China restricts foreign ownership of fund management companies to 49 percent.
China’s foreign joint venture fund management companies expect to double the assets they oversee by 2012, an April survey by PricewaterhouseCoopers LLP showed. Respondents said slow government approvals for new products may impede growth.
There is speculation that regulators may start granting approvals for mutual fund QDIIs in September, according to ICBC Credit Suisse’s Kwan. China is aggressively encouraging its companies to do mergers and acquisitions overseas, he added.
Kwan is starting a “segregated account” QDII fund that will be able to hedge currency exposure and profit from bets that assets around the world will both rise and fall, offering the possibility for diversification for investors in Chinese equities. His company is part-owned by Industrial & Commercial Bank of China Ltd., the world’s biggest lender by market value.
Stronger Yuan
The QDII system and the qualified foreign institutional investor, or QFII, program, are part of China’s plans to move toward a fully convertible currency. The yuan was little changed at 6.8308 per dollar as of 5:24 p.m. in Shanghai. The government has kept the currency around this level for the past year after allowing it to rise 21 percent against the U.S. dollar in the previous three years. Kwan forecasts yuan gains of about 3 percent to 5 percent a year.
Expectations for the yuan to strengthen are discouraging the establishment of new QDII funds, said Yang Aibin, head of fixed-income at China Asset, which supervises 230 billion yuan of assets. He added that this was his personal opinion.
“Fund managers are less willing to invest overseas because of possible foreign-exchange losses,” he said.
Source: Bloomberg, 28.07.2009
Filed under: Asia, China, News, Services, China 中国, Credit Suisse, Currency, FX Foreign Exchange, Index, Ping An, QDII, QFII, SAFE State Administration of Foreign Exchange
