Taiwan’s financial institutions are watching developments keenly in Hong Kong with regard to the offshore renminbi market for investment products, as well as the potential for ‘mini-QFII’ access to onshore assets. But for now they seem stuck on the sidelines.
Three Taiwanese fund managers have won QFII licences from the China Securities Regulatory Commission (Capital Investment Management, Fubon Financial and Polaris Securities Investment). So far none has yet received a currency quota from China’s State Administration of Foreign Exchange. Another four Taiwanese firms have QFII applications pending with the CSRC.
Leo Seewald, Taiwan chairman of Manulife Asset Management, speaking at AsianInvestor’s recent Taiwan institutional investment conference in Taipei, says Taiwanese firms have only a few ways to access direct China exposure.
They can buy renminbi bonds, but these require a QFII licence; the same goes for 'Panda' bonds issued locally by foreign issuers. They can buy synthetic products that are settled in US dollars and traded in renminbi. These products are mostly issued by property companies and may not fit a fund manager or institutional investor’s profile. Or they can invest in Chinese-issuer overseas bonds, but these are in dollars and so don't provide renminbi exposure.
Now there is the CNH market for so-called ‘dim sum’ bonds, with around Rmb400 billion of renminbi deposits at hand in Hong Kong. “The CNH market has not been open to Taiwan investors but this will come,” Seewald says.
“Everyone is interested in CNH bonds,” says Leon Huang, head of fixed income at SinoPac Securities. He cites the March cover of AsianInvestor magazine (“Starved of dim sum bonds”, by Leanne Wang): “There are many chopsticks trying to get one dim sum. We have the same situation in Taiwan.”
Huang says the island’s institutional investors are especially keen. SinoPac has already designed CNH-denominated money market funds for local investors. But he worries that the quality of the market may not be good enough, because many issuers of CNH debentures lack a credit rating. Investors don’t seem to care, he notes, but Huang worries that offshore RMB products may be riskier than investors realise. “It’s like the wild, wild west,” Huang says.
Another problem that Taiwanese investors are now finding is that CNH bonds are very low yielding. This is fine for Hong Kongers with RMB-based deposits, which are yielding practically nothing in interest. But for Taiwanese investors, the appreciating New Taiwan dollar means yield is important.
Local investors are also keen to get their hands on access to mainland shares once China formulates its so-called ‘mini-QFII’ regime, which is really about allowing mainland fund managers to run domestic portfolios that can be bought or sold in Hong Kong.
Xi Ouyang, vice-president at mainland company GF Securities, says the market expects these rules to be announced this year. He estimates the pilot scheme will be limited to Rmb10-20 billion in size, and initially put the bulk of investments into domestic bonds.
Although mini-QFII will open a new channel for international investors to tap the China story, Xi notes it's likely to come with its own licensing requirements – so it may not offer a meaningful break from the current QFII regime. “The earnings will probably have to stay in China, which means foreign institutional investors must be qualified to invest in such vehicles,” he says.
For foreign entities with a Taiwan business, such as Manulife and other global fund houses, the question is whether they can piggyback off their Hong Kong affiliate’s QFII licence in order to offer renminbi-denominated product to Taiwanese investors. “It’s not clear whether or not we can participate,” says Seewald. “Mini-QFII could help if the requirements are lower.”
Otherwise, Taiwan’s fund managers, regardless of whether they are owned locally or overseas, will remain limited to getting China access through Hong Kong products.
“There is potential for RMB product in Hong Kong,” notes Steve Tsai, senior vice-president at Chinatrust Commercial Bank. “But there are risks regarding CNH issuers, and investors from Taiwan need to be cautious.”