Deutsche, Amundi set for bigger share of yuan funds pie

HONG KONG Tue Dec 3, 2013 10:02pm EST

HONG KONG Dec 4 (Reuters) - Global fund managers are reaching outside Asia to tap growing demand for Chinese assets after authorities relaxed investment restrictions to promote the international use of the yuan.

Chinese asset manager Harvest Global Investments recently partnered with Deutsche Asset & Wealth Management to list an exchange-traded fund (ETF) in the United States under a growing yuan-denominated investment scheme offering U.S. investors direct access to China's A-share market for the first time.

Offshore ETFs focused on the A-share market are among the few options for foreigners to access mainland markets and they have become popular in recent months due to anaemic growth prospects in the West and a recovering Chinese economy.

Total assets under management for the offshore ETFs have swelled to about $19 billion in a few years, with the new U.S. listed ETF attracting more than $100 million in initial investments, the biggest launch among all equity ETFs in the U.S. ETF market this year, Deutsche Bank said.

"We are very satisfied," Marco Montanari, head of Passive Asset Management Asia Pacific of Deutsche Asset & Wealth Management, told Reuters.

The U.S. ETF has a way to go before it catches up with the top 3 A-share ETFs listed in Hong Kong, namely the ishares FTSE China A50, CSOP FTSE China A50 RQFII and ChinaAMC CSI300 RQFII, which take the lion's share in the ETF landscape, managing more than $13 billion in assets.

ETFs offered under a yuan-denominated investment scheme launched in 2011 - called the Renminbi Qualified Foreign Institutional Investor (RQFII) - is preferred more by investors than ETFs launched under its older cousin - the Qualified Foreign Institutional Investor (QFII) - started in 2002.

That is because the RQFII ETFs invest in all constituent stocks with the same weight as those in the benchmark, compared with the QFII ETFs, which use derivatives to gain exposure and thus have higher counterparty risk and tracking error.

COMFORT INVESTMENT

"U.S. investors have historically shown a strong interest in physical ETFs and a majority of ETFs in the U.S. are physical ones. It offers a higher level of comfort," said Deutsche's Montanari, who is speaking with regulators to list its first RQFII ETF in Europe.

The growth in ETF products targeting investors outside Asia has also gained traction because of regulatory prodding, with U.S.-based fund manager Krane reportedly in talks with Chinese Bosera to list an RQFII ETF in the United States.

Chinese funds and brokerages were granted quotas in the initial RQFII scheme introduced in 2011, but the State Administration of Foreign Exchange (SAFE) later invited foreign asset managers by allowing institutions based in Hong Kong to take part and expanding the quota to 270 billion yuan ($44.32 billion) at the end of 2012.

Regulators also permitted funds raised in offshore markets to be included in the scheme rather than restrict them to those raised in Hong Kong, paving the way for RQFII ETF listings.

"RQFII ETFs are quite active recently as foreign investors are optimistic on China's economic outlook and determination to conduct reforms," said Ben Kwong, chief operating officer at securities firm KGI Asia.

An ambitious reform blueprint unveiled last month has triggered a rally in the offshore Chinese markets and prompted foreign asset managers to look favorably at China with some funds offering yuan share classes to attract more investors.

European money manager Amundi Asset Management and DBS Bank led the way with renminbi-denominated units in their funds, with JPMorgan Asset Management and Value Partners reportedly also planning similar moves.

"One of the key challenges for us is to promote our brand among local investors. (There is) no better way to promote the brand than with a robust product," said Zhong Xiaofeng, Chief Executive Officer of Amundi North Asia.

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