Asset managers may find their yuan-denominated fund products a hard sell because of high investment fees, a clouded investment outlook, and weakening fundamentals in the domestic bond and equity markets, key market players say.
Many of the world's major fund managers are queuing to get a bite of the yuan investment pie as Beijing prepares to release a 200 billion yuan (HK$251 billion) quota under its renminbi qualified foreign institutional investor (RQFII) scheme as early as this week.
Firms that submitted applications include E Fund Management, GF Asset Management, BOCI-Prudential and Hang Seng Bank, sources told the South China Morning Post.
"If they have a chance to get a quota and the cost is not too expensive, why not?" said Philip Niem, the head of Asian discretionary portfolio management at Barclays. But he added that Barclays itself had no plan to apply as it saw little interest for the products among its clients, mainly high-net-worth individuals.
That may be due to the fact that the track record of RQFII products has so far not been convincing.
Seventeen RQFII bond funds generated average returns of just 2 to 3 per cent last year, according to Bloomberg. For its major competitors, so-called "dim sum" bonds which are issued offshore, returns averaged 7 per cent last year.
Three of the four RQFII exchange-traded funds have seen redemptions after launch in less than a year. With April drawing to a close, E Fund Management had just 60 per cent of its RQFII ETF quota invested, while Harvest Fund had 31.4 per cent invested.
A key disadvantage for the yuan products is high charges, according to research firm Z-Ben Advisors. To invest in RQFII, bond funds take investment fees of about 7 per cent of total investment, which include about 5 per cent subscription fees, custody fees and management fees. That compares with about 1 per cent investment fees to invest in local debt.
"Investors keen to monetise their yuan deposits can choose either dim sum bonds or an offshore renminbi bond index, both of which are cheaper than RQFII bond funds," said Cindy Qu, a Z-Ben analyst. "Why would I choose something yielding almost the same but carrying higher fees?"
While high charges may be a temporary issue, confidence in the China market, which was the worst performing equity market in Asia in the past three years, is a deeper-seated issue that may hurt demand for RQFII products.
"The performance outlook [for A shares] is range bound," said Neeti Bhalla, the head of tactical asset allocation for the investment strategy group at Goldman Sachs, who advises her clients to stay away from the China equity market given softening fundamentals, a long listing queue, and the benchmark index's heavy exposure to the banking sector.
In the hope of lifting returns, asset managers are lobbying Beijing to allow them to launch pure equity funds that offer greater flexibility to time the stock market, such as small-cap and long/short equity funds, according to Renault Kam, a director at GF Asset Management.
They are also trying to persuade the regulator to allow them to participate in the domestic repo-financing market to boost returns, according to a top executive at a local asset management firm who spoke on condition of anonymity.
Renminbi outright repo is a transaction where the holder of a bond can sell bonds to a buyer at an agreed rate, and currently only bonds issued on the mainland are allowed to participate.
Despite the uncertainty of returns earned by yuan products, however, there are virtually no negative consequences if a quota is not fully utilised, and hence the pipeline of applications will continue to be crowded.