Eric Chow of HSBC Securities Services
The race to launch funds using quotas from China’s renminbi qualified foreign institutional investor (RQFII) scheme won’t leave QFII or dim sum bond products in the dust, agreed a panel of asset managers at the RMB Rising conference hosted by AsianInvestor and FinanceAsia last week.
Instead, at least initially, RQFII will provide overseas holders of low-interest yuan deposits a way to gain better yields on their offshore RMB. It is also a step towards convertibility of the currency.
The RQFII scheme, which repatriates overseas renminbi back to the mainland, has gained appeal in the retail investment sector, says Steve Chiu, managing director of Bosera Asset Management (International), which last month gained a Rmb1.1 billion quota under RQFII and has applied to Hong Kong's Securities and Futures Commission (SFC) to launch a mutual fund.
“Our common view [is that] renminbi depositors will be very interested in our product,” says Chiu. Under SFC guidelines, an RQFII fund must comprise at least 80% RMB debt instruments issued in the mainland, with an optional portion of up to 20% in A-shares or other investible instruments in China.
Bank deposits only yield 1-2% per year, notes Joseph Tong, chief executive of the wealth management, brokerage and capital markets division of Sun Hung Kai Financial.
He agrees with Chiu that it will be an ideal product for retail investors whose priority is to be safe. “At least they can generate a return which will be higher than the interest-rate deposits they can get from banks.”
“One thing that’s good about RQFII," Tong adds, "is that you can access a wide range of government state-owned bonds, as well as top-quality corporate bonds in China.”
The stringent mechanism for bond issuance on the mainland has resulted in the availability of quality bonds under the RQFII scheme that can be “better than dim sum bonds”.
Eric Chow, deputy head of business development for Asia-Pacific at HSBC Securities Services, says there are mixed messages in the market, with some believing “that the dim sum market will be dying” due to its yield, which ranges around 3%.
However, Ben Zhang, joint managing director of Hai Tong International Asset Management, says there is “a misunderstanding about the dim sum bond market” for which one industry index has put the yield at maturity at 4.5%, he points out.
Tong adds that “given the large amount of interest in [RQFII] products, I don’t see any reason why the dim sum bond market could not further develop to tap into the renminbi [deposit base in Hong Kong], which is now at Rmb700 billion”.
Similarly, a death knell for QFII funds is premature, says Bosera’s Chiu, who views it as “a well-established scheme that has been around for about 10 years”. He adds: “Both schemes have their own merits.”
The panellists concurred that the RQFII scheme was a stepping stone towards full convertibility of the yuan. It's used for trade purposes, which is the first step towards internalisation, says Zhang of Hai Tong, and is now at the second phase, which is the offering of investable renminbi products offshore.
The final step would be use of RMB as a reserve currency, says Zhang, who believes that full yuan internalisation is only about five years away.
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