BEIJING — The 20-month-old Chinese Qualified Domestic Institutional Investor market could easily triple in the next year from a current total between $20 billion and $25 billion, investment experts estimate. Some managers say the total will be as much as $90 billion by the end of 2008.
The QDII platform, which allows domestic investors to access overseas stock markets, opens the door to U.S. and other foreign managers jostling for a piece of China’s fast-growing pool of investible assets.
Through this platform, four mutual funds subadvised by foreign managers raised a combined 202 billion yuan ($27 billion) between Sept. 19 and Oct. 22. All closed within a day of their launches and were oversubscribed by as much as four times their maximum of 30 billion yuan each, a quota set by China’s State Administration of Foreign Exchange, Beijing. The subadvisory managers are: JPMorgan Asset Management, New York; Deutsche Asset Management International GmbH, Frankfurt; BNY Mellon Asset Management, New York; and T. Rowe Price Global Investment Services Ltd., Baltimore.
“I was surprised that so much money was raised,” said R. Todd Ruppert, president and chief executive officer of T. Rowe Price Global, referring to the launch of China AMC Global Enhanced Equity Fund, which his firm subadvises. “China is becoming one of the larger markets in Asia for mutual funds, and the growth is supported as much by asset inflows as market appreciation.”
The QDII platform was officially introduced by the Chinese government in April 2006 to allow Chinese institutional investors such as banks, asset managers and insurance companies to invest overseas. The move was partly aimed at defusing the overheated domestic stock market and the upward pressure of the currency by promoting capital outflows, consultants and managers said.
However, QDII vehicles did not offer a viable alternative to domestic equity until earlier this year when regulatory changes allowed QDII funds to broadly invest in international stock markets, according to consultants. Previously, investments were largely limited to overseas fixed-income instruments, which paled in performance, compared with returns of domestic stocks.
But consultants and managers fear that strong performance by the domestic stock market will also threaten the short-term future of QDII funds, particularly as international equity markets have entered more volatile terrain in recent months. The CSI 300 index, which tracks 300 yuan-denominated shares traded on the Shanghai and Shenzhen exchanges, rose 129% this year as of Nov. 30.
Signs showing up
Signs that such returns cannot be sustained are beginning to appear, however. In November, the CSI 300 fell 18%, the steepest downturn since the benchmark was introduced in 2005.
“All products that invest overseas are struggling due to the turbulent international markets,” said Mandy Wang, chief executive of China International Fund Management, a joint venture between JPMorgan Asset Management and Shanghai International Trust & Investment Co. The China International Asia-Pacific Advantage Fund, a QDII fund launched Oct. 22 by the company, garnered a subscription of 116.3 billion yuan for a 30 billion yuan fund.
“Local customers are feeling a little shaky,” Ms. Wang added. “It may be difficult in the short term, although the direction is very clear in the long run. Chinese investors have to diversify and go abroad, so we’re very confident in this business.”
The success of QDII funds will be tested early next year when redemptions are allowed following the initial lock-in periods, which usually are several months, consultants said.
“We expect QDII to be quite robust in the long term,” said Peter Alexander, founder and principal of Shanghai-based asset management consulting firm Z-Ben Advisors Ltd. “A large number of (domestic) fund managers have already been approved to participate. Many don’t have the expertise to run international equity, which opens the door for international (asset management) firms.”
Foreign asset managers with a minority stake in or joint venture with Chinese financial institutions already have benefited. For example, DeAM has a 19.5% stake in Harvest Fund Management Co. Ltd., Beijing, and its subadvisory role for the Harvest China Overseas Equity Fund stems from that relationship. The same is true for JPMorgan, which owns a 49% stake in the joint venture with SITICO.
The introduction of the QDII platform also marks the first time foreign managers can directly access the Chinese asset management market without having to go through a joint venture or buy a direct stake in a domestic financial institution. Neither BNY Mellon nor T. Rowe Price owns a direct stake in the asset managers they’re subadvising, which are China Southern Fund Management Co. Ltd., Shenzhen, and Beijing-based China Asset Management Co. Ltd., respectively.
“The advantage is that we get a fee for the money we advise, but we’re not burdened by having to make an equity investment or starting a company from scratch,” Mr. Ruppert said.
More winners
Others winning QDII-related mandates include Franklin Templeton Investments, San Mateo, Calif., which was appointed by the Industrial and Commercial Bank of China Ltd. to manage its $475 million Oriental Pearl III-Prosperity Fund. The underlying portfolio will aim to allocate 60% in active equity and 40% in fixed income. The equity portion will primarily focus on Asia, and Brazil, Russia, India and China.
“We see significant opportunities down the road,” said William Y. Yun, president of Franklin Templeton Institutional, the institutional business development, client service and product management arm of the firm.
Mr. Alexander of Z-Ben estimates another 18 QDII mutual funds will be introduced in 2008, with foreign managers acting as subadviser in most cases. Others that have entered into agreements to subadvise QDII mutual funds not yet launched include: Societe Generale Asset Management SA, Paris; Fortis Investment Management NV/SA, Brussels; Credit Suisse Asset Management, Zurich; Schroder Investment Management Ltd, London; and DBS Asset Management Ltd., Singapore.
“Fund managers will certainly encounter bumps in the road,” Z-Ben’s Mr. Alexander said. “History tells us that QDII is not only integral to China’s capital market, it is also an extremely good opportunity for Western asset managers to play an indirect role … I don’t think those who are next in line to issue (QDII) funds will have any problems raising the 30 billion” yuan quota.
