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Mutual funds to see big boost

China's mutual-fund sector could grow more than sixfold to US$1.4 trillion by 2020, thanks to growing demand from global investors for mainland equity allocations, according to fund consultancy Z-Ben Advisors.

Foreign investors will eventually gain wider access to China's A-share market through the mini-QFII (qualified foreign institutional investor) scheme, which is expected to be expanded in the coming decade, Z-Ben said in a report.

Beijing will soon allow a first batch of about 10 asset managers, or overseas subsidiaries of domestic fund houses and brokerages, to launch mini-QFII products - yuan-denominated funds raised in Hong Kong that could be invested in mainland-listed equities.

Currently, only selected overseas institutions may buy A shares through the QFII programme, subject to a total quota of US$30 billion, which represents just 1.4 per cent of the total assets under management in the mainland's mutual-fund sector. Under the existing QFII system, foreign investors have to convert foreign currencies into yuan before buying A-shares.

Beijing started preparing the mini-QFII system last year as part of its phased programme of moving to increasing internationalisation of the yuan.

According to people with knowledge of the issue, the government will give the green light to about 10 players to raise funds under a mini-QFII pilot scheme, with each granted an initial investment limit equivalent to about US$500 million.

'We expect the mini-QFII to be expanded at some point in the next five years to allow for a direct conversion into Chinese yuan,' said Peter Alexander, a principal at Z-Ben. 'Demand from global asset owners for A-share exposure will only be really met though this approach.'

The mainland's economy now accounts for 9 per cent of the global gross domestic product.

However, demand for exposure to mainland equities cannot be met because of regulatory hurdles as Beijing imposed limits on the QFII investments. About 85 per cent of funds allocated for China equities are invested in Hong Kong.

'The advent of quota allocations to Chinese asset managers though the mini-QFII program will have a dramatic and immediate effect on the range of greater China choices available to global investors,' Z-Ben said in its report. 'Chinese asset managers will be able to offer 40 to 50 per cent allocations.'

The mainland's mutual-fund sector has grown strongly in the past five years thanks to Beijing's efforts to encourage institutional buying on the market. Assets under management jumped from US$16 billion to US$220 billion in the past five years.

Chinese fund managers and brokerages have been setting up subsidiaries in Hong Kong in the past two years.

'The move leads us to the conclusion that these institutions should be expected to play a major and important role in the actual management of global institutional investment,' Z-Ben said.

Yuan convertibility

US$30b

The total quota of A shares in Chinese mutual-funds which are available to overseas institutions. This accounts for just 1.4 per cent of the assets in the sector.

85pc

The proportion of total funds allocated for China equities which are currently invested in Hong Kong.

US$500m

The figure, in US dollars, which the Chinese government is expected to allow 10 asset managers from overseas to invest initially in the sector under a new pilot scheme.

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