CSOP prepares for mini-QFII with RMB bond fund launch

Asset managers expect to invest in onshore RMB bonds to enhance yield, waiting for Beijing's nod on a mini-QFII scheme. China Southern Fund is getting ready by launching a RMB fund through its Hong Kong arm.

CSOP Asset Management, a joint venture between China Southern Fund Management and Oriental Patron Financial Investments, is about to invest in the onshore renminbi bond market through a RMB bond fund, which will complete its initial fundraising tomorrow.

“We have been expecting to receive some allocation for mini-QFII for quite some time and want to get ready for that,” says Benoit Descourtieux, director of CSOP and chief investment officer at Oriental Patron. The fund will get exposure to permitted onshore investment instruments by the time the mini-QFII scheme is in place, he adds.

Onshore RMB bond yields tend to be higher than those of CNH bonds, making it a challenge to gain as much performance from the latter instruments.

“That’s why [a] mini-QFII [licence] would help us to enhance the fund’s return to investors,” says Descourtieux. “We expect the onshore [positions] to be a visible portion when the mini-QFII licence is in place.”

Resembling the qualified foreign institutional investor (QFII) scheme, which allows foreign financial institutions to participate in mainland markets, mini-QFII will allow Chinese asset managers to raise RMB offshore to be invested back onshore. It has been reported that at least 80% of the money raised will have to be invested in the domestic bond market.

For the time being, the CSOP fund will focus primarily on investment-grade CNH issuers but does not rule out buying synthetic RMB bonds.

Descourtieux sees the CNH bond pipeline becoming more fluid. “With China’s tightening macro policy concerning overall onshore liquidity, getting access to funding through offshore bond issuance is something corporates have been looking at seriously.”   

CSOP’s fund leverages on China Southern’s experience and direct, better access to mainland issuers. The fund’s manager, Guo Yanming, deputy CEO at CSOP, used to be executive director of fixed income at China Southern.

Domiciled in Luxembourg, the fund is available for overseas institutional and professional investors to subscribe in dollars or euro through private placement. The minimum subscription is $200,000, the liquidity is daily, the administration fee is 1%, and there is no performance charge.

In June 2009, CSOP established its first hedge fund for institutional clients to pursue absolute returns. It also provides investment advisory services to asset-management companies, including the Hong Kong portfolio of China Southern Global Dynamic Fund (a QDII fund), and manages client assets on a discretionary basis.

China Southern owns 70% of the CSOP AM, and Oriental Patron holds 30%.

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