International fund houses will have greater opportunity to seek sub-advisory work with Chinese firms as the nation’s securities regulator readies a series of liberalisations to broaden its QDII scheme. However, sources suggest they will need to offer a more in-depth service to win such business.
The China Securities Regulatory Commission (CSRC) has initiated a public consultation to run until April 13 as it looks to ease a number of restrictions for its qualified domestic institutional investor (QDII) programme, first launched in 2007 to facilitate offshore investment by domestic institutions.
The CSRC is seeking to scrap several thresholds to allow more fund managers and brokerages to become QDII licence holders. At the same time, it is also set to open the door for the overseas subsidiaries of Chinese fund houses to act as advisers to their parent companies.
The QDII programme has generally been underwhelming and speculation has mounted that it could be superseded, and even dropped, in the face of competition from other initiatives such as the proposed RMB cross-border funds platform between the mainland and Hong Kong.
Under the consultation proposals, the CSRC is looking to scrap requirements for fund management companies to have net assets of at least Rmb200 million, two years' operating history and Rmb20 billion in AUM to qualify for a QDII licence.
Similarly, securities firms would no longer be required to have minimum net capital of Rmb800 million nor at least a year’s operating history in collective asset management.
In the revised version, QDII applicants will only be required to demonstrate stable financial status, possess qualified staff with overseas investment experience (at least one middle manager with five years' experience in overseas investment and three other employees three years' experience), have good corporate governance and internal controls and not have been punished by regulators in the past three years.
Further, the offshore subsidiaries of Chinese fund firms would no longer need to have a minimum of five years’ experience in securities investment – which had effectively counted them out since they had not had enough time to build up this experience – and AUM of at least $10 billion, allowing them to compete with foreign managers and freeing up Hong Kong arms to advise their onshore parents.
Among the 73 QDII funds, only 21 have hired foreign sub-advisors to help with asset allocation. Of these, most are foreign shareholders: CCB Principal is advised by Principal Global Investors; Invesco Great Wall by Invesco; and Harvest by Deutsche Investment Management.
Chinese fund houses were initially eager to hire foreign sub-advisers when the QDII scheme was first launched. But post the global financial crisis, many have parted ways with their offshore partners in favour of managing their own QDII funds.
They argue that their foreign counterparts are not providing them with what they need. “Advisers provide me with research reports and model portfolios, but this is not what I want,” notes one manager at the Hong Kong subsidiary of an onshore QDII licence holder. “What I want to have is training and the methodology of their proposed asset allocations.”
Yet there are still areas where foreign advisers are seen as having the edge. “They have advantages in alternative investment and global asset allocation,” says the fund manager. “Hong Kong subsidiaries have the capability in Chinese equities, but they have not yet cultivated that in global equities.”
Only last week it was reported that CSRC chairman Guo Shuqing was set to become governor of Shandong province, although the regulator moved swiftly to deny any knowledge of this.