In anticipation of a regulatory move to expand their narrow investment horizon, Chinese trust companies have regained interest in launching qualified domestic institutional investor (QDII) products.
Just last week, Hwabao Trust initiated a QDII strategy focused on closed-end funds in Hong Kong, while several other trust firms are understood to be readying similar launches.
Hwabao was the last trust company to receive a QDII quota from the State Administration of Foreign Exchange (Safe), a total of $500 million on July 17.
It has been building a QDII business from scratch since last October. Its new product has a one-year tenor and subscribes to funds in Hong Kong that invest in one-year guaranteed corporate bonds.
“The product is offered in US dollars to avoid foreign exchange risks arising from subscription in renminbi,” the company states. “There are scarce [investment] channels for investors holding US dollars and yield is low. This product is intended to address that issue.”
As at July 20, six trust firms had obtained combined quota of $2.3 billion: China Credit Trust, Shanghai International Trust, Zhonghai Trust, PingAn Trust and Dalian Huaxin Trust.
Further, China Resources SZITIC Trust and New China Trust are also preparing to offer QDII products, AsianInvestor understands. Sources at both firms say they expect the China Banking Regulatory Commission to broaden the investment scope of trust QDII products soon.
According to guidelines issued in 2007, trust QDIIs can invest in investment grade certificates of deposit, bonds and structured products issued by overseas entities, bonds issued by the Chinese government and enterprises, mutual funds and equities listed in Hong Kong.
But a senior manager at China Resources SZITIC Trust says: “This investment scope is too narrow for trust QDIIs to achieve good investment returns. Our domestic trust products can yield 10% per year. That’s why in the past we were not that interested in launching QDII products.”
In the future he expects trust QDIIs’ investment scope to be on a par with fund management firms and securities companies, which are regulated by the China Securities Regulatory Commission.
Nevertheless, the fact is that QDII mutual funds have evidently struggled to attract Chinese retail investors and fundraising has been difficult.
Some 12 QDII funds have been incepted this year to August 20, compared with 24 across the whole of last year. Except for the first batch of four launched in 2007, which all have more than 10 billion shares, the majority are very small.
The smallest among the universe of 63 QDII funds is Invesco Great Wall’s Greater China fund with just 5.2 million shares.
“One of the key reasons QDII mutual funds are not popular among investors is unsatisfying performance,” notes a source. “But in fact the demand is there as some Chinese are keen to invest overseas.
“Trust products can be one-to-one tailor-made for clients [typically wealthy individuals with a minimum investment of Rmb1 million] to meet their specific investment needs.”
Trust companies can act as both an active asset manager and a channel for Chinese investors to buy overseas assets, which to date has largely been into international fixed income given that the A-share market has been trading at its lowest level since 2009. The Shanghai Stock Exchange Composite Index has sunk over 20% in the past year.