Nikko, the first to launch a fund for mainland-issued assets, hopes to attract buyers seeking higher yields offshore Japanese savings investors' desperate need for higher returns suggests that a ground-breaking fund investing in mainland-issued yuan bonds could be the first of many. China looms large on the radar screen of the world's largest creditor nation that has net foreign assets of about 175 trillion yen (HK$12.15 trillion) and has long chased high yields in foreign markets due to its near-zero domestic interest rates, according to Nikko Asset Management fund manager Hiroki Miyazato. Nikko, one of Japan's three largest asset managers, last week announced the launch of the first fund to invest in mainland-issued bonds under China's qualified foreign institutional investor (QFII) scheme. 'Japanese investors have invested in the US dollar, euros, the Australian dollar and so forth. Now it is Chinese yuan,' said Mr Miyazato from his office in Japan. He ruled out suggestions that Japanese investors were chasing a possible upward revaluation of the yuan, but were seeking to diversify holdings into a balanced global portfolio. Nikko's bond offering was likely to be the first of many QFII funds targeting Japan's yield-hungry investors, he said. 'We are investing because of China's stable inflation environment, its [solid] financial status and overall economic growth rate,' Mr Miyazato said. A closed capital account - which inhibits the free flow of non-trade and direct investment-related money transfers - could be a boon for investors since the mainland economy was shielded from fiscal crises, such as the one that affected the region in 1997-98, he said. Mr Miyazato confirmed that Nikko's QFII application was submitted to mainland authorities at the end of last month. If approved, it will be the ninth authorised fund and the first to invest in government bonds, the others being equity focused. He declined to comment on the planned size of its proposed fund but a Japanese press report said it had applied for a US$250 million investing mandate. QFII rules require a minimum US$50 million investment. Shanghai-based Bank of Communications has been appointed as Nikko's custodian lender. Nikko planned to keep the fund at a 'manageable size' regardless of demand among Japanese investors and hopes to win approval from mainland authorities this year, he said. Asset managers are betting on China's underdeveloped bond market increasing in size and scope as quota restrictions in favour of big infrastructure projects and state enterprises are phased out in the next three years. This week mainland securities companies will be permitted to issue corporate bonds, as part of the government's drive to divert their reliance for funding on banks to diverse and longer-term sources. Japanese government bonds pay holders an annual coupon rate of 0.05 per cent for a one-year bond and 1.4 per cent for a 10-year bond. The corresponding rate for Chinese bonds is 2.439 per cent and 2.798 per cent, respectively.