In a landmark move, Julius Baer has become the first private bank to obtain a qualified foreign institutional investor (QFII) licence, which allows it access to onshore Chinese equity and bond markets.
The Swiss firm applied for a $200 million quota late last year, received approval in December and is awaiting confirmation of the amount it will get.
Julius Baer also today announced the launch of RMB conversion services, current and fixed-deposit accounts, RMB unit trusts, equity-linked investments and bonds. The new products and services are currently available in the Hong Kong and Singapore booking centres.
Most of the new QFII quota will be used for a private-placement China A-share fund, on which the bank will be advised by one or possibly two onshore asset managers.
“We are interviewing what we believe to be the top three or four asset managers [of A-shares],” says Kenneth Ho, Asia-Pacific head of products at Julius Baer in Hong Kong. One of these firms is Simon Murray and Company, which has more than 30 staff picking stocks in China, he tells AsianInvestor.
The bank already offers A-share funds to clients, but it is waiting for the first RMB-denominated IPO in Hong Kong.
Julius Baer also has a relationship with Singapore’s DBS Asset Management (soon to be acquired by Nikko Asset Management), with whom the Swiss firm launched an RMB bond fund in December that has so far raised $135 million (the total market is currently around $2 billion).
This bond fund was the second to hit the market afterthat of Schroder Investment Management, which raised $800 million for its first product through private placement in partnership with two banks (reportedly Merrill Lynch and UBS).
The main challenge for any RMB fixed-income fund, however, is gaining access to sufficient supply of Hong Kong-issued CNH or onshore RMB bonds, as Ho acknowledges (see also the cover story in AsianInvestor, March 2011).
It’s a fast-growing market, but each bond is over-subscribed substantially, although Ho says he expects to see the first RMB bond issued in Hong Kong very soon.
Moreover, he says, “with Singapore's close trade and commercial relationships with China, we expect interest in RMB-denominated products there to mirror the strong growth in Hong Kong”.
Ho argues that RMB or RMB-related products should form 5% of all portfolios. “We feel that strongly about it – it’s one of closest things you can get to a sure bet.”
The bank will take a similar approach to distribution of RMB products as it does with its other offerings.
Yves Robert-Charrue, Zurich-based global head of investment solutions at Julius Baer, says: “Unlike some of our competitors, we are completely obsessed with open architecture, and this will be reflected in our offering of RMB funds and structured products.”
The aim of the QFII quota, he adds, is on the one hand to allow the firm to bring expertise into Asia and on other to export Asia-focused products to clients outside the region.
Meanwhile, the market for RMB structured products is still developing and Julius Baer is working with the regulators to facilitate this. “When the market develops we'll be ready to launch,” says Ho.
Structured notes such as equity-linked notes are very popular in Hong Kong and Singapore and are starting to be denominated in CNH, says Ho, adding that the bank can book these products.
The growth of the RMB market has been and is set to continue to be extremely rapid. Hong Kong officially became China’s offshore financial centre in 2004 when renminbi banking was launched.
In July 2009, a pilot scheme for cross-border RMB settlement was launched in five Chinese cities. By mid-2010, RMB trade settlement had gone global, paving the way for the development of offshore RMB services and products in Hong Kong.
RMB deposits in Hong Kong stood at Rmb314.9 billion in December, according to the Hong Kong Monetary Authority. So, of the $270 billion in foreign exchange holdings in Hong Kong, RMB deposits already accounts for over $50 billion, notes Ho.
Julius Baer upgraded its Hong Kong operation to a full bank branch late last year (and other firms are doing the same) and is set to open its Shanghai representative office and Singapore trust company this year.
The bank’s total client assets stood at Sfr267 billion at the end of 2010, with assets under management accounting for Sfr170 billion.
Even Julius Baer's rivals express admiration at the business it has built in Asia – a sure sign it is doing something right.