Chinese securities firm Shenyin Wanguo plans to apply for additional RQFII quota for a new product to take advantage of expected regulatory relaxation, despite the fact it has unused quota.

The company was among the first to receive quota (Rmb900 million) at the end of last year in the RMB-denominated qualified foreign institutional investor (RQFII) programme, as reported.

In March it launched its RMB Mainland Investment Fund, a bond fund targeting retail investors which has recorded a cumulative return of 2.4%. As of last month it was 67% allocated to medium-term notes, 15% to corporate bonds, 8% to short-term paper, 6% to money-market funds, 3% to cash and 1% to enterprise bonds.

However, Black Bai, deputy general manager of Shenyin Wanguo Securities, points out that it has not fully used up its RQFII quota, with the fund facing stiff competition from bank-deposit rates.

“Retail investors can enjoy a 3.5% interest rate for one year via RMB deposits in Hong Kong, and they think that return is more stable than an RQFII bond fund,” he notes.

Army Yan, head of business and product at Shenyin Wanguo, adds that retail investors are chasing 5-6% returns from high-yield bonds as a way to beat bank-deposit rates.

Looking ahead, Bai says that Shenyin Wanguo wants to apply for fresh quota in anticipation that authorities will permit greater flexibility in product design, to enable new funds to fit prevailing client demand.

Instead of granting quotas to each applicant, he expects quota to be allocated to each product according to its features. While Shenyin Wanguo does not have a particular product launch in mind, it wants to have the resources to act once it has a clear idea of investor interest at the time.

CSRC launched the RQFII scheme last December with an initial Rmb20 billion quota, including strict guidelines that no less than 80% could be invested in fixed income and no more than 20% in equity. A second Rmb50 billion batch in additional RQFII quota was signed off this April, allowing qualified providers to issue A-share ETF product.

Then last month CSRC pledged that RQFII quotas would be increased by a further Rmb200 billion, and pointed to the introduction of liberalisation in product design.

Aside from future considerations, Bai said that RQFII bond funds were still attracting capital from institutional investors, helped by the low global interest-rate environment.

“They are interested in high-quality issues, including government and investment grade bonds because they have risk management control,” says Yan.

As for China’s A-share market, Shenyin Wanguo forecasts that 2013 will be a battle between the bears and the bulls. One pivotal point will be the third plenary session of the 18th Central Committee of the Communist Party of China set to be held in September, when leaders map out the nation’s five-year economic plan.

Shenyin Wanguo is forecasting across-the-board corporate earnings for Chinese firms of 0.6% next year, with strong potential downgrade pressure. The price-to-earnings ratio of A-share stocks (ex-financials) is at a 39% premium to its historical low at present.

These factors indicate that now is not the right time to enter the A-share market, suggests Lin Peng, Shenyin Wanguo’s chief A-share market strategist. He believes opportunities to accumulate equities will present themselves in 2013 amid volatile sentiment.

He is expecting a technical rebound in February unrelated to fundamentals and says investors should overweight sectors set to benefit from urbanisation, including intelligent transport systems, energy-saving construction and e-commence.

But with Beijing unlikely to introduce loosening measures on the property sector, Lin believes this technical rebound will be exposed, leading to an equity correction starting in April.