In QDII first, BoC invests into equity Sicavs

The Bank of China is investing in international equity funds managed by Credit Agricole Asset Management and Fidelity.
The Bank of China is said to be the first commercial bank to take advantage of newly expanded rules governing the mainlandÆs qualified domestic institutional investor (QDII) regime, and has invested money into equity mutual funds registered in Hong Kong.

BoC has been given a quota of $2.5 billion to invest via QDII by the State Administration for Foreign Exchange (Safe), an arm of the PeopleÆs Bank of China charged with managing foreign reserves. Last year it was the first commercial bank to put this to work by investing in overseas fixed-income funds.

In May, the Chinese Banking Regulatory Commission announced an expansion of QDII from just global bonds to include Hong Kong equities and international funds authorised (but not necessarily domiciled) in Hong Kong.

Anticipating the liberalisation, BoC has been in talks with Credit Agricole Asset Management and Fidelity Investments, according to executives at those two companies.

BoC has recently begun investing in their Luxembourg-domiciled equity funds, says Thierry Mequillet, regional CEO at CAAM. BoC officials could not be reached by press time.

The fund managers could not detail the exact nature of the investments but say that BoC has set up a fund of funds to tap their Sicavs, particularly aiming at H shares and red chips. Since last year it has also directly invested in global fixed income; combining the two, it has launched international balanced funds for its base of domestic retail depositors. BoC has reportedly invested up to $1 billion into overseas assets, or 40% of its QDII quota.

Beijing has approved a total QDII quota of $18.5 billion, of which $14.5 billion has been allocated to commercial banks. Up to 50% of this can now be invested in equity. Until recently there has been minimal uptake by mainland investors in QDII, because of fears the renminbi will appreciate and because the domestic A-share market has been so hot. Global fixed income hedged back into renminbi could only return a measly 1%. But groups like Bank of China hope a balanced international product may have some appeal, particularly if some investors grow nervous about a sharp correction in the A-share market.

The other appeal is that mainland investors can invest in H shares or red chips that may be trading at half the earnings multiples as the parentsÆ A shares. Mequillet predicts many mainland banks will roll out products themed around the convergence between A shares and Hong Kong-listed stocks of mainland companies.
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