A renewed wave of qualified domestic institutional investor (QDII) fund launches in China over the past year has created opportunities for international custodian banks, and the trend looks set to continue in 2011.
In one of the most recent examples, Yinhua Fund Management Company hired BNY Mellon Asset Servicing as the global custodian for its QDII product, the Anti-Inflation Theme Fund, launched in December.
BNY Mellon – which obtained its China branch licence last year – was selected by Yinhua’s domestic custodian, China Construction Bank (CCB), to provide settlement, income collection, safekeeping and accounting for the fund’s overseas assets. Beijing-based Yinhua had over Rmb85 billion ($12.88 billion) of assets under management as of December 31.
China’s State Administration of Foreign Exchange had granted quota to 87 QDII investors as of the end of September. As of January 6, there were nine outstanding QDII fund applications to be approved by the China Securities Regulatory Commission.
Leow Chong Jin, head of Asia at BNY Mellon Asset Servicing, says the bank is also investing locally in its technology to enable it to advise on the set up of exchange-traded fund and fund-of-fund structures.
Leow is confident that the QDII scheme is reviving after being out of favour for two years. “In 2011, we expect to see a steady increase in the number of QDII launches,” he says, “if those already in the development process are a true indication of future trends.”
Northern Trust is also gearing up for more QDII business. “Strengthening our support with the new branch in Beijing [which was set up last year], we are looking to extend our services, and a few QDII fund prospects are under discussion,” notes Pamela Yuen, North Asia sales director of asset servicing at the Chicago-based financial services group.
The landscape for custodian banking in China has clearly become increasingly competitive. “The real challenge for global custodians, however, is that competition is growing faster than opportunities in China, since all of the major competitors are either already here or actively looking to enter,” says Francois Guilloux, director of regional sales at Shanghai consultancy Z-Ben Advisors.
A number of the global players – including BNY Mellon, Brown Brothers Harriman, Citi, HSBC, Northern Trust, Standard Chartered and State Street – have presences in China, and some have been in operation for more than a decade.
Having a strong local partner often seems to be the key to success for foreign custodian banks in China. The appointment of an overseas custodian tends to be undertaken in cooperation with a local bank, notes Z-Ben. “Time after time, we see recurring pairings of domestic and overseas custodians,” adds the firm, "suggesting a very tightly locked-up market.”
For instance, BNY Mellon has been awarded another three global custody mandates for QDII funds through CCB – for Fortis Haitong and Fortune SG in 2008 and ICBC Credit Suisse last year. The US firm’s first global mandate was awarded by China Southern, and its domestic custodian, Industrial and Commercial Bank of China in 2007.
Northern Trust’s domestic partner is Bank of Communications, which has chosen the US firm for several global custody mandates for QDII products over the past few years.