Market volatility scaring QFII holders away from retail

PUBLISHED : Wednesday, 02 February, 2005, 12:00am
UPDATED : Wednesday, 02 February, 2005, 12:00am

Citigroup, following UBS, takes the plunge with A-share-based product

For years, foreign banks and fund houses had been waiting for the implementation of the Qualified Foreign Institutional Investors (QFII) licensing system. Yet months after the licences finally arrived, most recipients are reluctant to use them for retail products.

Many worry about the volatility of mainland shares.

Those brave enough to tap the retail market, on the other hand, are confident that including mainland stocks in their retail portfolio will bring more benefit than harm to their clients.

Possessing the second-largest QFII investment allowance, Citigroup last month joined UBS in becoming the only foreign banks to have launched retail investment products based on the mainland's A shares.

The bank's director of Asia-Pacific equities derivatives, Wee Yee Yeong, said he was confident the four A-share stocks in the fund's portfolio - China Yangtze Power, China International Marine Containers, China Merchant Bank and Baoshan Iron and Steel - embodied enough quality to draw Hong Kong investors to the fund while admitting that choices were limited at the moment.

'Obviously there're a lot of good companies in the mainland but not many are well covered by analysts and investment bankers,' said Mr Wee. 'We hope over the next few years there will be a lot more interest and coverage by foreign banks and analysts in them.

'When the awareness is higher, then maybe we can have more choices to invest in them. Unfortunately this will take some time.'

The fund also includes two blue chips and two mainland-based stocks from the Hong Kong stock market.

However, not everyone agrees that mainland stocks are suitable for retail investors. Andrew Au Siu-fai, senior vice-president of structured products for Asia at SG Securities, said he did not believe many banks would follow the lead of UBS and Citigroup.

'If you look at the Shanghai stock market, it has been very volatile in the last quarter so I'm not sure if retail investors are ready to take that kind of risk,' said Mr Au. 'Even if they're interested in mainland companies, they can always choose those that are listed in Hong Kong.'

Mr Wee said the track record of Citigroup's fund, which closes for subscriptions tomorrow, might provide a good indicator for its competitors as to how big the demand for retail market A-share-based products was.

'A lot of them are taking a wait-and-see attitude to see how [Citigroup's fund] will attract investors' attention,' Mr Wee said.

Under QFII regulations, a licence holder can invest in all forms of mainland-listed securities.

Taking stock

Many QFII licensees are wary of A-share volatility

Citigroup's new fund includes four A shares

Choice among A shares is limited by lack of research