By Wang Zhenghua (China Daily)
Updated: 2007-09-25 10:18

The Bank of East Asia (BEA) has surprised investment circles in Shanghai by announcing that its newly introduced product under the qualified domestic institutional investor (QDII) scheme had gained more than 20 percent in only half a month amid the international market turmoil brought about by the US credit crisis.

But then, that particular QDII product is different from the many others that have preceded it. In a way, it can be said to be revolutionary in QDII terms.

"In this product that does not guarantee principal, the likelihood for investors to generate a high return has significantly increased, and the impression of QDII products providing only low yields could be changed," said Lam Chi Man, executive vice-president of the bank's China entity.

The excellent performance of the single product goes against a general depressive trend for QDII funds whose attractiveness is severely challenged by the potential high yield at the soaring domestic stock market and the prospect of further renminbi appreciation, which resulted in increasing unwillingness to invest in overseas capital markets.

Meanwhile, a scheme in the pipeline to let individual clients invest directly in Hong Kong securities is believed to bring about a negative impact on QDII products, whose performance already underwent a roller-coaster ride during the recent shake-up in global capital markets caused by US subprime mortgage woes.

But statistics indicated that qualified operators are increasingly investing their clients' assets in overseas funds and share market rather than bonds to notch up higher returns and boost the scheme's attractiveness, on the back of the government approval in May to widen its scope of investment.

Sources said the banking watchdog is about to require banks to lower the minimum investment of customers to let more low-end individuals participate in the program.

The QDII scheme, debuting last April, is part of China's efforts to encourage capital outflow as its foreign exchange reserves, the world's biggest, swelled to US$1.33 trillion in the first half of the year.

The government has so far granted QDII quotas of about US$15 billion for 20 banks, US$5.2 billion for insurance firms and US$500 million for Chinese fund management firm Hua'an. Large foreign and domestic banks have eagerly seized upon the program as a means of driving business growth.

In the past, they have mostly focused on fixed-income products compared with the potential high returns in the mainland share market whose benchmark index has climbed to nearly 5,500 points, five times its early-2006 level.

To enhance the attractiveness of their products, many banks are churning out products promising higher returns - along with higher risks.

The Bank of East Asia last month launched the BEA funds, investing customers' money in BEA Hong Kong Growth Fund or BEA Asia Strategic Growth Fund. By the end of last month, the net asset value of the funds surged 20.23 and 15.49 percent respectively, and they are already open for redemption.

"As an important investment channel, QDII is able to provide satisfactory rewards for investors if the right products are launched at a proper time," Lam said.

The banker also said the move to allow mainlanders to invest directly in the Hong Kong stock market will not have too huge an impact on the QDII program, which claims an advantage in risk control and is more suitable for new hands in the market or those too busy to operate on their own.

The Hong Kong-based bank is about to launch another fund on September 10, helping clients invest their assets in four Hong Kong shares including Datang Power and China Merchants Bank.

There is a growing trend of qualified banks helping customers diversify their investment in funds and shares, not only bonds, said Qin Si, a researcher with an institute under the Southwestern University of Finance and Economics.

Statistics from the institute suggest that since June, more banks, including China Construction Bank and HSBC, have developed funds that directly invest in overseas mutual funds.

"The trend indicates that both domestic and foreign banks are inclined to lure customers with higher yields rather than lower risks," Qin said.

Analysts are also urging investors to open their wallets for new funds to diversify from the roaring but notoriously volatile A-share market.

"The key strategy of investment is diversification and taking a global approach," said Judy Hsu, wealth management and franchise head of Citi Global Consumer Group in Asia Pacific. "Just don't put all your eggs in one basket."