Foreign investors suffer QFII blow

Funds under the investment scheme report a 6.12pc loss for the first eight months of the year

PUBLISHED : Friday, 14 September, 2012, 12:00am
UPDATED : Friday, 14 September, 2012, 3:45am

China has been opening its markets wider to foreign investors this year, but so far it is proving to be a rough ride.

The most recent relaxation came in July as part of celebrations surrounding the 15th anniversary of Hong Kong's return to Chinese rule. At the time, some commentators hailed the widening of the so-called qualified foreign institutional investors (QFII) scheme as a "gift" for Hong Kong investors. But the tailor-made funds have turned out to be a gift of red ink.

According to the latest figures compiled by Lipper, a unit of Thomson Reuters, the QFII funds reported a 5.65 per cent decline in August and a 6.12 per cent loss for the first eight months of this year. By comparison, the Shanghai Composite Index has dropped 4 per cent so far this year. The index lost 14.3 per cent in 2010 and 21.7 per cent last year and was among the world's worst-performing stock markets in the past two years.

Unlike Hong Kong, which does not control capital flows in and out of the city, foreign institutional investors on the mainland can only invest in domestic stocks and bonds through two QFII schemes that operate under quota systems. One is mostly denominated in US dollars and the other in yuan.

The US dollar QFII was launched in 2002. In April, the mainland raised the quota to US$80 billion from US$30 billion and sped up the approval of licences to increase the number of participants. There are now 181 international banks and insurers, up from about 140 at the end of last year

Also in April, Beijing lifted the total quota on the yuan-denominated QFII, which was launched in December 2011, to 70 billion yuan (HK$85.72 billion) from 20 billion yuan. The Hong Kong subsidiaries of 21 mainland firms can provide Hong Kong investors with yuan fund products or exchange-traded funds linked to A shares, which refer to shares of companies listed on mainland markets.

Mark Konyn, chief executive of Cathay Conning Asset Management, said China stocks - either those listed in Hong Kong or the A shares on the mainland - had been the worst-performing in Asia this year. "Domestically, tight liquidity conditions have discouraged investors and, overall, international investors have turned away from risk assets," he said.

In contrast, Lipper said the qualified domestic institutional investors (QDII) scheme, which are investment funds for mainland investors to invest outside China, recorded a modest gain of 1.29 per cent in August and is up nearly 3 per cent so far this year, outperforming Chinese stock markets and funds.

Konyn said QDII had been more successful this year because many overseas bond investments had delivered high-yield returns, offsetting weak stock markets worldwide.