Ding Chen, international business director at China Southern Fund Management in Shenzhen, says the fund house is preparing to release its second qualified domestic institutional investor (QDII) fund before the end of this year. She says a new investment office will also be set up in Hong Kong to expand China SouthernÆs international investment capabilities, with a goal of taking the company international.

China Southern released the industryÆs first QDII fund last year. In the first hour of the launch day, close to $6.7 billion was raised, well exceeding the $2 billion quota the regulator had prescribed. The China Securities Regulatory Commission (CSRC) later gave way and allowed the company to keep $4 billion as the upper limit for its overseas fund.

The fund was launched and invested at the height of the subprime crisis in September, which later saw mainlandÆs NAV-obsessed media heavily criticising diversification plans and overseas investments. According to Zhou Liang, head of research at Lipper in China, overall performances of QDII funds have since improved, recording a 3.32% growth in February. However, the funds have still lost an average of 20.15%.

For its second QDII fund, Ding hints there will be less reliance on external advisory and more focus will be put on internal investment capabilities. She says the product is still in the design stage and many possibilities are being explored.

Meanwhile, China SouthernÆs Hong Kong office will initially be staffed by a small team, mostly of research professionals and investment managers who will help manage part of the company's QDII funds.

If China SouthernÆs expansion plans go through smoothly, it would mark the first such move by a Chinese fund management company û a trend to watch out for, as it could mean significant cross-border arbitraging and exchange opportunities. The move has been previously unseen among Chinese fund management companies. Mainland companies that have come to Hong Kong in the past include insurers, banks and the national social security fund office.

Hong Kong's Securities & Futures Commission (SFC) expects Chinese fund management companies to set up operations in Hong Kong under the Closer Economic Partnership Arrangement (Cepa). China and Hong Kong reached a further understanding in 2006 to liberalise China market access for qualified Hong Kong service suppliers, under a supplement known as Cepa IV.

Importing an existing product from third-party managers is not what China Southern hopes to see, says Ding, elaborating on the plans for the Hong Kong office.

A Hong Kong office would serve as a strategic location to build up an investment team, and a chance to better research opportunities that China Southern cannot cover in mainland China, such as H-shares, initial public offerings and futures.

With stock index futures becoming a reality in the A-share market this year, Ding says China Southern is studying possible launches of hedge fund products, absolute return strategies, and momentum trading. She says while these developments are a possibility that China Southern is working on, these strategies might only exist in the space of high-end discretionary accounts and still be subject to regulator approval.

ChinaÆs fund industry witnessed explosive growth during the 2006û2007 stockmarket frenzy. Total assets under management reached Rmb$4 trillion by the end of 2007. With 60-odd fund managers operating in the market, most of the so-called tier-one managers are now accustomed to managing multi-billion dollar portfolios on a daily basis.

Ding concedes that QDII was a key first step for the industry. But for long-term staying power, she says the company needs better market coverage for investors and must have innovative products. She envisions China Southern providing investment services for foreign investors in international markets.