Investors rush for QDII bandwagon
Through-train delays spur race into alternative way of buying Hong Kong stocks, writes Jane Cai
Frustrated in efforts to invest directly in Hong Kong's surging stocks through the much-delayed 'through-train' scheme, mainland investors are pouring cash into professional funds that can already buy shares here. Under the qualified domestic institutional investor (QDII) scheme, these funds are the only legitimate channel for mainland investors wanting exposure to Hong Kong's red-hot market.
But there are warnings the increasing popularity of the fledging QDII scheme may be short-lived, with forecasts the Hong Kong market, largely driven by 'through-train' hopes, faces a correction .
QDII funds have been heavily oversubscribed since September as it became apparent government delays in launching the through train were likely to continue. The Hang Seng Index has surged 36 per cent since August 20 when the scheme allowing mainland investors to buy shares directly in Hong Kong was first announced.
Four QDII products launched by fund management companies since September attracted double the combined US$18 billion in funds sought, according to the State Administration of Foreign Exchange. The immense interest meant each fund was able to close its offer on the first day of the issue.
And investor enthusiasm has kept on growing with each new QDII offering. A fund offered by Shenzhen-based China Southern Fund Management attracted 50 billion yuan on September 19 while the Shanghai-based China International Fund Management on October 15 drew more than 100 billion yuan, a record amount for a mainland-issued fund.
While QDII funds are allowed to invest in markets from 33 countries and regions including Singapore, India, South Korea and Australia, the focus is clearly on the booming Hong Kong market. The 22 banks with QDII licences launched 19 new products in August and 18 in September, higher than previous months and many of them focused on Hong Kong.
'It's unimaginable if a QDII product does not invest in Hong Kong stocks at the moment,' Galaxy Securities fund analyst Feng Yongan told a CCTV programme.
Analysts believe tens of billions of US dollars have already poured into Hong Kong via QDII funds.
Impending through-train investment has made Hong Kong even more attractive, pushing the Hang Seng through 30,000 in intraday trading last Thursday.
However, Professor Zhong Wei, a financial lecturer at Beijing Normal University, said QDII popularity would be short-lived. Investors who have been eager to jump on the through-train bandwagon may be just as eager to jump off.
In fact, the through-train has left mainland officials in a dilemma. If they launch the scheme too early they could expose problems but if they delay too much more speculation is likely.
'Many investors are 'policy arbitrageurs' who are taking advantage of the through-train delay,' Professor Zhong said. 'Once the train starts, the QDII boom ends.'
He said a possible correction in Hong Kong after the train was launched could quench mainland investors' enthusiasm to buy stocks in the city in the future.
Professor Zhong expects less than US$100 billion to flow into the Hong Kong stock market through QDII funds and the through train next year.
'Hong Kong should not pin hopes on mainland capital to create a bullish market. It might be marginalised if it does not seek substantial and creative changes,' he said, without specifying what changes should be made.
Still, Southern Fund manager Xie Wei-hong said his company had intensively built up positions in Hong Kong-listed resources and telecommunication stocks after it established a QDII fund last month. The fund's net value has appreciated 3 per cent.
Beijing-based Harvest Fund manager Li Kai said Hong Kong had been less volatile than the mainland markets over recent years, meaning less risk for investors.
Song Qingfeng, a 36-year-old investor with three years' experience in the mainland A-share market, said he had snapped up QDII products.
'The Shanghai Composite Index has touched 6,000 points from below 1,000 in the middle of 2005,' Mr Song said. 'The shares rose too fast and accumulated big risks. In the long term, it's good to diversify.'
The through-train scheme aims to ease growing pressure on the yuan and give mainlanders more investment choices but there are rising fears some of the market volatility seen in Shanghai and Shenzhen will be transferred to Hong Kong. The mainland's foreign reserves have soared to US$1.43 trillion while the yuan has gained more than 9 per cent against the US dollar since it was unpegged from the greenback in July 2005.
Although it did not specify an investment quota or when the plan could start, the announcement of the through train helped the Hong Kong market recover from the impact of the US subprime loan crisis, pushing it to a record high.
Deutsche Bank forecasts that US$40 billion would flow into Hong Kong before June next year while Morgan Stanley estimates US$50 billion to US$100 billion in the initial period under the scheme.
But cracks in the scheme appeared soon after its announcement. Bank of China chairman Xiao Gang said no timetable had been set for the start of the through train - remarks echoed by several other senior mainland officials at the Communist Party's 17th National Congress last week.
That heightened concerns that the scheme could be delayed much longer than expected, with some speculating the launch could be put off until next March or April.
Dai Xianglong, the mayor of Tianjin - the pilot city for the scheme - said the complexity of the through train meant that it was still being studied. The People's Bank of China governor Zhou Xiaochuan said more tests had to be done before the scheme could be launched.
Sources said the issue had become a victim of political wrangling among government bodies with different vested interests. While banks are eager to get a slice of the business, securities regulators are worried the money outflow would adversely affect the mainland stock markets.
Academics invited to advise decision makers last month said the intention to introduce the scheme had not changed. But many technical problems needed to be resolved and several economists preferred strengthening professional investment in Hong Kong through QDII funds rather than letting less-experienced individuals loose on the city's market.
The regulator allowed a trial QDII programme to invest overseas in October last year, a first in the mainland and did not extend further approvals to other QDII funds until this July.
'It is wise to give development preference to QDIIs as they are more professional than individuals,' said Professor Zhong. 'Also, it's easy to manage the institutions as they have to get investment quota from regulators.'
Jing Ulrich, JPMorgan Securities' chairman of China equities, expects US$90 billion to exit the mainland through the QDII programme in the next year and at least a third of the money is likely to be invested in Hong Kong.
The early raft of QDII products was likely to have a heavy allocation for mainland plays listed in Hong Kong and the United States, she said.
'The QDII programme will be the primary channel by which mainland retail investors can invest abroad through professionally managed funds,' she said. 'The through-train programme, when eventually launched, will serve as a complement rather than a substitute and could be subject to overall or individual investment limits.'
Mr Xiao said a threshold would be set for the minimum amount an individual could invest. Mainland media have said that could range from 100,000 yuan to 300,000 yuan.