Hospital pension awaits QFII quota
The Hospital Authority Provident Fund Scheme, the second-largest pension fund in Hong Kong by asset size, has received approval to invest in mainland markets.
The scheme, which manages HK$42.3 billion worth of pension monies for 33,000 full-time staff at 41 hospitals and 123 clinics run by the Hospital Authority, was cleared in January by the China Securities Regulatory Commission (CSRC) to receive an expected US$100 million quota as part of the qualified foreign institutional investors (QFII) scheme to invest in mainland stock markets.
It is now waiting for the State Administration of Foreign Exchange (Safe), China's foreign currency regulator, to grant the quota. Foreign investors issued with QFII licences by the CSRC still need to apply for investment quotas from Safe to buy Chinese A shares or listed bonds.
The provident fund's trustee chairman John Lee Luen-wai (pictured) said the CSRC's acceptance of investment by big pension funds showed that China was interested in the longer-term view.
'Hospital Authority Provident Fund and other pension funds are eyeing long-term investment instead of betting on short-term gains. The CSRC's move granting the QFII quota to us and other big provident funds shows the regulator wants to see more long-term investors investing in the A-share market,' Lee said last week.
China does not allow overseas investors to freely trade in its bonds or stocks markets. However, the QFII scheme was launched in 2003 to grant big Western financial institutions quotas that allowed them to trade shares in the A-share market and listed bonds in the Shanghai or Shenzhen markets.
To date, 142 QFIIs - including investment banks or fund houses such as UBS or Goldman Sachs - have been cleared to buy A shares, with a combined investment quota of US$22 billion. The scheme is expanding to let in provident funds, and since December licences have been granted to US pension fund giant Principal Financial and South Korea's National Pension Service.
Heman Wong, executive director of the Hospital Authority Provident Fund Scheme, said Hospital Authority employees for years had called for their funds to be invested on financial markets in the world's second-largest economy.
Wong said if the US$100 million quota was fully invested, it would represent about 1.8 per cent of the provident fund's assets. 'This would be a good diversification of our pension investments,' he said.
Hospital Authority staff can choose from six funds managed by independent fund managers. The fund's current investment mix is 58 per cent in stocks, 34 per cent in bonds, 3.8 per cent in hedge funds, and the rest in short-term bonds or cash.
However, brokers questioned whether it was the right time to invest in China, with the Shanghai stock market among the world's worst performing markets over the past two years. The Shanghai Composite Index lost 21.7 per cent last year, following a 14.3 per cent drop in 2010.
According to data provider Lipper, QFIIs lost 26 per cent on their A-share investments last year, below the 21.7 per cent drop in the key market index.
'We consider it is good to buy when the market is low,' Wong said. 'In addition, we're looking at a long-term investment because our members won't take their money until they retire. The China markets may well do very well over the long term.'
Principal Financial Group Asia president Rex Auyeung Pak-kuen said customers would soon be increasingly focused on the A-share market.
'I believe the A-share market has matured over the last few years and I can see more pension money entering,' Auyeung said.
'However, and as is typical of any emerging market, one has to do a lot of research before jumping in with both feet.'
Other local pension fund managers also want to gain more access to the mainland markets.
Hong Kong Investment Funds Association chief executive Sally Wong said the association had put forward a proposal calling on China to bring in a modified tranche under QFII to allow the Mandatory Provident Fund and other pension funds to invest.
Last year, Secretary for Financial Services and the Treasury Chan Ka-keung led a delegation which included representatives of the HKIFA on a visit to the relevant mainland authorities to raise the issue.
'These will be win-win proposals as the mainland authorities are keen to attract pension money and other long-term stable inflows while many Hong Kong employees want to gain exposure to the mainland capital markets to capitalise on China's long-term economic growth potential,'' she said.
At present, a MPF manager cannot structure a China A-share fund, because the QFII requirements do not dovetail with MPF requirements.
Hong Kong law also bans MPF scheme managers from investing too much in China because neither Shanghai or Shenzhen markets are 'approved stock exchanges'. MPF managers, even if they have a QFII quota, can only invest up to 10 per cent of their funds or a constituent fund in the mainland market.
Wong wants changes to MPF regulations to make it easier for pension money to be put into the mainland.
Assets held by the Mandatory Provident Fund, covering 2.5 million employees in Hong Kong, as of September