China returns a big lure for investors
Sellers of trust and wealth-management products report a surge in buying interest from Hong Kong and overseas as interest rates slide
Sellers of trust and wealth-management products on the mainland say there has been a rise in interest in their offerings from offshore buyers, including Hong Kong residents, especially after the yuan strengthened to new highs in recent weeks.
The interest in shifting savings to the mainland comes as central banks around the world continue to launch monetary easing measures, the latest being the United States Federal Reserve's third round of quantitative easing. The resulting increased liquidity has driven interest rates to record lows in Hong Kong.
A salesman at Bohai International Trust, who asked to be known only by his family name of Hou, said a substantial number of Hong Kong and foreign investors were interested in buying investment trust products, many of which have infrastructure and local government financing vehicles' loans as their underlying assets.
Trust products that offered higher returns, such as annualised interest rates of between 8.5 per cent and 10 per cent, often sold out quickly and were popular among investors from Hong Kong or offshore, in the prevailing low-interest rate environment, according to a product manager at Sichuan Trust.
The top-end return for yuan investment products in Hong Kong such as structured investment deposits, yuan-denominated qualified foreign institutional investors (R- QFII) scheme products - which enable subsidiaries of mainland securities firms to sell yuan-denominated funds to retail investors in Hong Kong - and dim sum bonds usually only offer annualised returns of between 3 per cent and 5 per cent.
Hot money influxes to Hong Kong in the past few weeks have prompted the Hong Kong Monetary Authority to intervene on exchange markets to stem a rise in the value of the currency.
Hot money - which generally refers to liquidity that chases short-term returns through property, stocks or currency - complicates efforts to fight inflation. The government recently introduced measures aimed at curbing demand in the property sector fuelled by low interest rates.
Joy Yang, chief China economist at Mirae Asset Securities, said investor expectations of yuan appreciation had cooled compared with last year and there had been two interest rate cuts on the mainland.
"Many investors have also come to realise that wealth management products and trust products are not safe havens," Yang said.
However, with the yuan priced at the strong end and concerns about a hard landing on the mainland easing, it was reasonable to expect that Hong Kong's abundant pool of yuan should start flowing back to the mainland, said Sun Mingchun, an economist at Daiwa Securities.
Although underground remittance agencies violated foreign-exchange regulations on the mainland, using the agencies to shift yuan, or convert Hong Kong dollars to yuan on the mainland had become a common practice, Hou said.
Hong Kong residents were free to purchase trust products as long as they held a mainland bank account, and both foreign and Hong Kong residents could open bank accounts on the mainland easily, said Patrick Phua, a Beijing-based partner at law firm Ashurst.
The regulations on whether foreign and Hong Kong residents can buy wealth-management products remain murky.
Private research provider Chengdu Benefit, which specialises in wealth-management products, said according to regulations by the State Administration of Foreign Exchange in 2007, foreign and Hong Kong investors who held residential permits for one year or more could use income generated on the mainland to buy yuan or foreign-currency denominated wealth-management products.
The China Banking Regulatory Commission's latest regulation handbook issued last year on wealth-management products did not mention specific rules on foreign and Hong Kong investors.
In practice, banks sometimes turned a blind eye if investors were unable to provide all the documentation needed, one wealth-management product seller said.
Mainland regulators might already have identified hot money flowing in and some mainland banks have stopped selling investment products to foreign and Hong Kong investors, according to two mainland bankers.
Ming Pao recently reported that a Ping An Bank staff member said the People's Bank of China had asked the bank to stop selling high-yield, yuan-denominated products to foreigners, including Hongkongers.