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Funds and brokers look forward to QDII scheme

(Shanghai Daily)
Updated: 2007-06-25 09:06

China's decision to let fund managers and brokers invest client capital overseas won't immediately soak up liquidity in the heated domestic market or ease the yuan's appreciation, industry analysts said.

But the initiative, set to kick off on July 5, will help mainland securities firms work to international standards before the country opens the sector to full foreign competition.

China's stock regulator on Wednesday issued rules to allow fund managers and brokerages to pool citizens' yuan or foreign-currency capital to invest in securities abroad.

Funds with at least 200 million yuan (US$26.2 million) in net assets and 20 billion yuan of client capital under management can apply to invest overseas.

Brokers must have a minimum 800 million yuan in net capital and manage two billion yuan of investors' funds to join the Qualified Domestic Institutional Investor, or QDII, program.

Industry analysts including Wang Rufu at Orient Securities said that about 20 funds and 10 brokers can meet the financial requirements, which means the initial scale of the funds won't be huge.

"We expect the expansion of QDII to funds and brokers will have limited impact on the domestic capital market at the current stage," said Wang. The effects of channeling capital abroad "will only be gradual."

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S o far, nearly 20 commercial banks have been allowed to invest in overseas capital markets since the QDII scheme was launched last year. Just one fund - Huaan Fund Management - is included in the scheme.

Many market participants saw the QDII expansion as part of regulatory attempts to dampen soaring domestic yuan-denominated shares, which have nearly tripled in value since early 2006. The rising market makes banks' QDII products unattractive.

Other investors said the move will help cut the country's growing foreign exchange reserves and thus reduce the pressure on the Chinese yuan to rise in value.

"The predictions are all correct in a long haul but they are not the case for the short term," said Lu Mingwei, a China Galaxy Securities Co dealer. "QDII might have a brighter prospect this year, but not solid enough to quickly channel a large chunk of funds out of the country."

Lu believed that stock regulators will approve QDII products by funds and brokers on a case-by-case basis to gauge market response and contain operational risks.

In addition, domestic investors are also likely to be initially cautious about the QDII program, although they are eager to invest in markets like Hong Kong, Li said.

The valuation of mainland stocks is now much higher than that of stocks listed abroad, especially shares traded in Hong Kong, making overseas investments an appealing alternative, analysts said.

"Those that should be more excited about the expansion are definitely the financial institutions," said Wu Zhiguo, a Guohai Securities Co analyst. "The expansion should be translated into a signal that regulators hope to help securities firms make their presence felt on the global stage."

Sources said a slew of funds, including giant China Southern Fund Management, have finished designing their QDII funds and will send applications for government approval as early as July 5.

Brokers including Citic Securities and Everbright Securities are expected to apply next month to launch products to invest in overseas securities.

"It's a good chance for brokerages and fund firms to expand out of their traditional businesses and even out of the country," said Galaxy Securities's Lu. "They have to catch the opportunities before regulators open the industry to overseas competition."