The product is expected to lure Japanese investors who are drawn to the mainland's higher yields China's domestic treasuries market is to be opened to foreigners for the first time, through a pioneering fund which will allow Japanese investors to buy mainland bonds. Nikko Asset Management will apply for regulatory approval to launch a closed-end treasury fund under the mainland's qualified foreign institutional investor (QFII) scheme. According to Nikko's custodian bank, Shanghai-based Bank of Communications, the fund will be marketed primarily towards retail investors in Japan. The bank said the fund would raise at least US$50 million, the minimum limit under QFII investment rules. The fund's partners are finalising details for regulatory approval. While eight QFII funds have so far been approved by mainland regulators, all have been equity funds focused on the mainland's A-share markets. Nikko's is the first QFII fund to target mainland bonds, which had previously been reserved for Chinese investors. In May, UBS and Nomura Securities became the first foreign institutions to secure QFII approvals. Guo Nasha, deputy general manager of the bank's fund custodian department, said Japanese investors had a huge appetite for mainland financial products, as they looked for alternatives to years of near-zero interest rates at home. Japanese investors are estimated to hold almost 1,400 trillion yen (HK$98.18 billion) worth of financial assets, including stocks, bonds and savings deposits. 'Japanese investors are traditionally conservative,' Ms Guo said. 'But they are very keen on China's treasuries market.' Japanese yen bonds pay holders a mere 0.05 per cent annual coupon for a one-year bond and 1.4 per cent for a 10-year bond, according to Selina Tsang Wai-sze, an associate director of Schroders Investment Management (Hong Kong). By comparison, mainland bondholders enjoy much higher returns. The coupon rate on one-year bonds is 2.439 per cent and 2.798 on 10-year bonds. This compares to an annual average return of 1.98 per cent on bank deposits. Yin Junhui, a currency and bond trader with China Merchants Bank, said that given the relatively small size of the proposed bond fund, it would not have much impact on the mainland market. More than two trillion yuan (HK$1.87 trillion) worth of treasuries are quoted in China. According to Mr Yin, mainland bond funds yielded an average return of more than 10 per cent last year, outpacing securities fund yields and in line with last year's best performing global bond funds. But in the absence of futures and swaps products, bond investors in China cannot easily hedge their risks. When BOC Hong Kong (Holdings) raised US$2.8 billion through a global IPO in July last year, in Japan alone the offering attracted subscriptions totalling $2.9 billion. The strong demand for the IPO alerted mainland corporates to the potential demand among Japanese investors for future offers. For example, the forthcoming Hong Kong listing of the People's Insurance Co of China will be heavily marketed in Japan by listing syndicate member Nomura Securities. Demand for Nikko's bond fund and other QFII products could also be boosted by increasing speculation that China will eventually be forced to revalue the yuan upwards, adding to expected returns.