First fund gets approval to invest overseas
By Sun Min (China Daily)
Updated: 2004-03-05 08:45

China's long-awaited qualified domestic institutional investor (QDII) scheme is expected to be introduced soon, after the National Council Social Security Fund was chosen to lead the way overseas.

It is the first domestic institution to get the green light to invest in the overseas capital market.

Industry sources said the State Council recently approved the proposal by the Ministry of Finance to let the social security fund invest overseas, with Hong Kong as the preferred target market.

Bank of China International Holdings Ltd, the overseas investment banking subsidiary of the Bank of China, may take the lead role in the fund's overseas asset management, sources revealed.

The social security fund controlled about 124 billion yuan (US$15 billion) of assets at the end of 2002. It is estimated that only about 5 billion yuan (US$ 603.8 million) will be allowed to be initially invested in Hong Kong.

An official involved with the fund said the council has been undertaking a number of studies in the lead up to the move overseas, but he was not able to say when all of the frameworks would be in place.

Even with State Council approval, many preparations still have to be made to implement the plan, including the drafting of detailed rules and a decision on a fund manager and custodian.

The council is already carrying out securities investments on the domestic bourses through mainland fund managers.

It will take some time for the QDII investment to formally start, as the authorities are yet to set the market threshold and come up with parallel rules to allow such outbound capital investment when the renminbi is not fully convertible under the capital account, said Tang Di, an analyst at CITIC Securities Co.

When China approved the qualified foreign institutional investor (QFII) system last year, allowing foreign investment into the domestic A share and bond markets, it took eight months for UBS, the first licensed QFII, to get through all of the paperwork and make its first investment order.

Tang said an institution like the social security fund should follow a prudent investment methodology to minimize risks.

The process of choosing the appropriate fund manager is one of the most crucial issues. Though some domestic fund managers have expressed interest, overseas institutions have their own advantages, Tang said.

Other domestic institutions, including insurers, securities houses and fund managers, are also looking forward to entering the overseas capital market.