UPDATE 2-China Southern Fund gears up for QDII launch

(Adds fund-raising target and timetable of launch in para 2)

By Charlie Zhu and Lu Jianxin

SHANGHAI, Sept 3 (Reuters) - China Southern Fund Management Co said on Monday it will launch a fund next week to invest client money in overseas stocks under a national scheme that will potentially pump billions of dollars into international markets.

The asset manager, based in the southern Chinese city of Shenzhen, said it had applied to regulators for a 15 billion yuan ($1.99 billion) quota for the stock fund, which would be launched on Sept. 12 and closed for subscription on Sept. 28.

This is the first Qualified Domestic Institutional Investor (QDII) stock fund to be set up by a Chinese fund house. Four other fund firms, including China Asset Management and JPMorgan's (JPM.N) China fund venture, are planning similar moves.

The scheme is part of Beijing's efforts to encourage capital outflow as China's foreign exchange reserves, the world's biggest, swelled to $1.33 trillion in the first half of the year as a result of massive trade flows.

Vincent Chan, head of China research at Credit Suisse, said in an article published last month that Chinese financial firms, including funds, brokerages and banks, might invest a combined $21 billion in overseas markets over the next 12 to 18 months.

QDII funds are important to China's asset managers as it will open up a new business channel for them. They are now totally dependent on products targeting domestic stocks and bonds.

RISK DIVERSIFICATION

China Southern, one of the country's largest and oldest fund houses, urged investors to open their wallets for the new fund to diversify from the roaring but notoriously volatile domestic A-share market, which is trading at a hefty premium to overseas stocks.

"Global asset allocation is becoming an irreversible trend," the company said in the statement.

"When the A-share market is trading above 5,000 points and at a price-to-earnings ratio of about 40 times, it is indeed the time to think about global diversification," it said, citing the much lower P/E ratio carried by most overseas stock markets.

The benchmark Shanghai composite index .SSEC is trading at around 5,300 points, quintupling its early-2006 level.

China Southern said it would invest proceeds of the fund mainly in stocks in 10 overseas markets, including the United States, Japan, Hong Kong, Switzerland and Italy. The other five are Russia, India, Brazil, Malaysia and South Korea.

The fund can invest all of its proceeds in stocks, compared with 50 percent as the ceiling set for QDII products launched by commercial banks, China Southern said, adding that U.S. Mellon Financial MEL.N will be the consultant for the fund.

QDII products launched by Chinese banks have mostly focused on fixed-income products, many of whose returns have been undermined by the appreciation of China's yuan CNY= currency.

Beijing has so far granted QDII quotas of about $15 billion for 20 banks, $5.2 billion for insurance firms and $500 million for Chinese fund management firm Huaan.

Huaan's QDII fund, an international structured product launched with great fanfare last October, had returned just 3.8 percent -- in dollar terms -- from its inception to the end of June, said Z-Ben Advisors, a Shanghai-based fund consultancy.

Analysts attributed the dull performance to the structure of the product, a balanced fund that is virtually a fund of funds.

China Southern's QDII product mainly targets retail investors, who need to put in as little as 1,000 yuan ($132.6) each. Commercial banks' QDII products have excluded small-time investors as they require minimum investment of 50,000 yuan to 300,000 yuan, the statement said. ($1 = 7.542 Yuan)