QFII opens door to higher yields

BEIJING / HONG KONG - Financial companies on the Chinese mainland are gaining an edge over global rivals as new investment quotas make them the gatekeepers for international funds seeking access to the local bond market, where sovereign yields are as much as double those in Hong Kong.

China Universal Asset Management Ltd, Harvest Fund Management Co and Haitong Securities Co are among 21 mainland companies that are starting funds to raise yuan outside of the Chinese mainland for investment in domestic securities. At least 80 percent will go into the interbank bond market, where two-year government notes yield 2.86 percent compared with 1.39 percent for the Dim Sum bonds due September 2013. The yield on similar-maturity US Treasuries is 0.23 percent.

China, the world's second-biggest economy, is opening up its bond market as slowing growth and inflation fuel speculation interest rates will be cut. GDP increased 8.7 percent in the fourth quarter, the least since mid-2009, based on a Bloomberg estimate.

"If there are any interest-rate changes, they will be going down," said Sheldon Gao, chief executive officer of China Universal Asset Management (HK) Ltd, whose Shanghai-based parent manages $9.4 billion in assets. "That creates a lot of opportunities for bond investors in China."

Investment companies and brokerages on the Chinese mainland are being given "a head start" over foreign competitors in tapping global demand for the nation's fixed-income securities, said Peng Wah Choy, chief executive of Harvest Global Investments Ltd. "It's an amazing opportunity for us to build a flagship before the rest of the international fund-management community gets on the bandwagon."

Blackrock Inc, Schroder Investment Management Ltd and Fidelity Investments are among more than 110 foreign companies approved to invest as much as $21.7 billion in mainland stocks and exchange-traded debt under the qualified foreign institutional investor program, known as QFII. The pool of debt they are restricted to is less than 2 percent the size of the 20 trillion yuan ($3.2 trillion) interbank bond market

The QFII program, which is also called RQFII, only allows the Hong Kong subsidiaries of mainland financial institutions to participate and has an initial quota of 20 billion yuan. The government will expand the program and boost quotas, China Securities Journal reported on Monday, citing Guo Shuqing, chairman of the China Securities Regulatory Commission.

"This is only the first batch and it won't surprise us to see more quotas awarded to new or existing companies," said Gao, who before joining China Universal was chief executive officer for China at Schroder Investment Management (HK) Ltd. "In the next batch, we'll definitely see more freedom. This batch is just to test the water. So we want to provide low-risk, low-volatility products."

Bloomberg News