Doubts raised as Taiwan targets QDII cash

Island authorities have moved to double the investment quota for mainland investors, but Chinese fund houses are sceptical about the market’s appeal.
Doubts raised as Taiwan targets QDII cash

Doubts remain over the attractiveness of Taiwan equities to qualified mainland Chinese investors even as the island’s securities regulator has moved to double the limit on their investment quota.

The Financial Supervisory Commission this week proposed raising the investment ceiling on qualified domestic institutional investors (QDIIs) to $1 billion, from $500 million.

The issue was raised during an economic and finance committee meeting of the Executive Yuan – the chief government policy-making body in Taiwan.

The quota has yet to be finalised and depends on regulatory consensus from both sides, notes Lee Jih-Chu, the FSC’s political vice-chairman.

It is also dependent on the growth of RMB deposits in Taiwan, with the FSC eager for domestic banks to facilitate conversion of Taiwan dollars to renminbi via their fledgling RMB operations.

At present only QDII fund management firms and securities companies regulated by the China Securities Regulatory Commission (CSRC) have access to Taiwan’s securities market. Lee expects QDII banks and insurers to follow, although the timeframe is uncertain.

As at July 20, China’s State Administration of Foreign Exchange had granted QDII quota totalling $83.2 billion, of which banks had about $10 billion, FMCs and securities firms held $47.9 billion, insurers took up $23.1 billion and the rest belonged to trust companies.

Yet QDII fund managers themselves appear to have an indifferent approach to Taiwan’s equity market, pointing out it is comparatively small and concentrated in technology stocks.

“The attraction of the Taiwan [equity] market as a whole is limited, though we don’t rule out picking individual stocks with performance potential, such as some consumer stocks,” notes Gary Bi, managing director of international business at Penghua FMC.

Penghua manages the Global Discovery QDII Fund of Funds, which has exposure to Taiwanese equities. But Bi does not see strong fundamentals underpinning the market given that Taiwan has an export-led economy and demand from the US and Europe is likely to remain muted.

“Taiwan’s stock market is relatively small and heavily concentrated on the technology sector, which has already passed a high-growth stage,” adds Bi. “The market is quite volatile, which makes us cautious in holding these stocks over the long term.”

Rongtong Fund Management takes a similar view. The firm is awaiting CSRC approval for a new QDII fund which will have a small allocation to Taiwanese stocks.

Tony Liu, the fund house’s head of international business, says: “We will pick some individual stocks, but overall the market is small and several large caps such as Taiwan Semiconductor Manufacturing represent almost the entire market.”

But he says the firm has no plans to launch a Taiwan-specific QDII fund, recognising that there would not be enough demand. As it stands QDII funds are struggling to attract capital from Chinese retail investors and fundraising has been tough.

Since the start of this year to August 15 some 12 QDII funds had launched, compared with 24 for the whole of 2011. Except for the first batch of four launched in 2007, which all have more than 10 billion shares, the majority are very small.

The smallest among the universe of 63 QDII funds is Invesco Great Wall’s Greater China fund with just 5.2 million shares.

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