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U.S. Now Open to Chinese Retail Investors

  • April 9, 2008
  • Alex S. Dai

The China Banking Regulatory Commission (CBRC) said Monday that it had reached an agreement with the Securities and Exchange Commission that allows Chinese institutions to invest in the U.S. stock market and in investment funds selected by the SEC.

The U.S. joins Hong Kong, Singapore, Japan and the U.K. as the fifth foreign market accessible to Chinese retail investors under the government’s qualified domestic institutional investor (QDII) program. The move was welcomed by HSBC China and Bank of Communications Schroders Fund Management Co., both participants in the program.

“Global investment opportunities are a natural trend,” said a spokesperson for the joint venture of Shanghai’s Bank of Communications and U.K.-based Schroders Investment Management, which acquired its QDII license last year. Bank of Communications Schroders plans to launch its first product by year-end, according to the spokesperson, as part of Schroders’ goal to double its assets in the greater China region, to $32 billion, by 2013. So far, five QDII products have been launched by other fund companies.

“In the long term, we are still very confident in the QDII program and its investing value,” added the spokesperson, “despite the current weak performance of many QDII products from other banks.”

“We welcome this development with the QDII” program, said an HSBC China spokesperson, though she declined to comment on any specific plans the bank has to expand QDII offerings of U.S. assets. HSBC China launched its first QDII fund last year.

However, Zefeng Huang, policy analyst with Shanghai-based Haitong Securities Co., points to QDII funds’ recent disappointing track record. Most QDII products have suffered heavy losses due to volatile global market conditions and the rise of the yuan. Last month, Beijing-based China Minsheng Banking Corp. was forced to liquidate its QDII product after its value fell by more than 50 percent.

As of year-end 2007, there were 262 QDII products available, offered by 16 of the 23 Chinese commercial banks that had obtained QDII licenses. Total sales amounted to 41.4 billion yuan ($6 billion).

“QDII products are still not very attractive for investors because of their weak performance since the launch of this program in 2006,” said Huang. “The current hard-to-predict U.S. stock market [further] reduces the attraction” of such products.

According to Huang, the CBRC’s opening of the U.S. market is not likely to boost the program’s faltering numbers. “In the short term, it will not bring a large amount of capital away from the Shanghai and Shenzhen stock exchanges to impact the domestic market.”

However, expansion into the U.S. market was inevitable, said Haochuan Zhang, analyst with Shanghai-based consulting firm Z-Ben Advisors. “The U.S. stock market is the most developed market with bigger capacity and many high-quality listed companies,” he said. “Besides Hong Kong, mainland investment managers are also more familiar with the U.S market than with Japan and Singapore.” Such familiarity will help them better assess risks, added Zhang.

The CBRC is one of four emerging market regulators the SEC has been talking to since it conducted its first Emerging Markets Conclave in February 2007, an event designed to promote effective cross-border market oversight and facilitate efficient capital formation. SEC chairman Christopher Cox has also met with regulators from Brazil, South Africa and South Korea.

Late last month, the SEC said it had begun formal discussions with Australia on a mutual recognition arrangement for the nations’ securities markets, echoing a similar announcement made with the European Commission on Feb. 1.

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