Yuan funds abroad fore­see pickup


Re­vived ap­petite for emerg­ing mar­ket stocks and bonds is start­ing to in­clude China -- and even its cur­rency yuan ren­minbi.

The China As­set Management Com­pany has seen more in­flows into eq­uity funds that in­vest off­shore yuan into main­land eq­ui­ties since Bri­tain’s June 23 vote to leave the Euro­pean Union.

CSOP As­set Management Ltd had its strong­est in­flows in 14 months in June to an ex­change­traded fund that pumps yuan held abroad into China’s sov­er­eign bonds.

A net $604 mil­lion has flowed into China via the Ren­minbi Qual­i­fied For­eign In­sti­tu­tional In­vestors pro­gram in the first seven months, ver­sus an out­flow of $4.1 bil­lion last year, Z-Ben Ad­vi­sors es­ti­mates. In­flows into stocks have dom­i­nated this year at about $880 mil­lion.

“Peo­ple are look­ing again at the emerg­ing mar­kets, which were un­der­val­ued, China for ex­am­ple,” said Fred­die Chen, Hong Kong­based man­ag­ing di­rec­tor at China As­set, which has used just over half of its RQFII quota of 21.8 bil­lion yuan ($3.3 bil­lion) and al­lo­cated 80 per­cent to eq­uity with the rest in fixed in­come. “We have seen a lot more in­ter­est” af­ter the Brexit vote high­lighted de­vel­oped na­tion risks, he said.

The in­flows will help slow the de­cline in China’s for­eign-ex­change re­serves and sup­port the yuan, which dropped 3.7 per­cent in the past 12 months in Asia’s worst per­for­mance. They may also add fuel to a rally in the Shang­hai Com­pos­ite In­dex, which is up 5.3 per­cent this quar­ter but still down 13 per­cent for 2016. While the na­tion’s sov­er­eign bond yields have plunged this year, they are still high com­pared with neg­a­tive rates in Ja­pan and Europe, prompt­ing global funds to boost hold­ings by the most in two years in June.

“Our over­seas clients have shown more in­ter­est in RQFII lately,” said Melody He, head of ex­change-traded funds and in­dex so­lu­tions in Hong Kong at CSOP, which said on Aug 11 that its China 5-Year Trea­sury Bond ETF tripled as­sets to 2 bil­lion yuan this year. “The two main rea­sons be­hind it are fall­ing yields in de­vel­oped mar­kets and a sta­bi­liz­ing yuan.”

Mor­gan Stan­ley wrote in an Aug 20 note there could be a “pow­er­ful” catchup rally in Chi­nese stocks as global in­vestors are again tar­get­ing de­vel­op­ing na­tions. While the Shang­hai bench­mark climbed 16 per­cent from a low on Jan 28, that trails a 24 per­cent rise for the MSCI Emerg­ing Mar­kets in­dex. The best-per­form­ing bond fund in China has also said gov­ern­ment eco­nomic stim­u­lus means money may flow from on­shore cor­po­rate debt into stocks.

Since RQFII li­censes were first awarded in 2011 to pro­mote the global use of the yuan, of­fi­cial data show China has granted 508.4 bil­lion yuan in quotes to 169 fi­nan­cial in­sti­tu­tions. The prod­ucts suf­fered heavy re­demp­tions since the cur­rency’s de­val­u­a­tion last Au­gust.

This year, China of­fered a quota of 250 bil­lion yuan to US in­sti­tu­tions, which will lead to more de­mand for yuan prod­ucts, ac­cord­ing to Li Li­uyang, a se­nior an­a­lyst at Bank of Tokyo-Mit­subishi UFJ China Ltd.

One thing that could de­rail the mo­men­tum is a stronger dol­lar. Fed­eral Re­serve Vice-Chair­man Stan­ley Fis­cher on Aug 21 sig­naled that a 2016 rate hike is still un­der con­sid­er­a­tion. The yuan, which closed at X.XXXX per dol­lar on Fri­day (Sept 2), is fore­cast to weaken to 6.75 by year-end, ac­cord­ing to a sur­vey of econ­o­mists by Bloomberg. Yields on the na­tion’s 10-year sov­er­eign bonds have fallen 10 ba­sis points this year to 2.72 per­cent. That com­pares with a 50-ba­sis-point drop in av­er­age yields for the Bloomberg Emerg­ing Mar­ket Lo­cal Sov­er­eign In­dex.

“Although yields have come down in China as well, the Chi­nese mar­ket still looks at­trac­tive on a rel­a­tive ba­sis,” said Ray­mond Gui, a Hong Kong-based se­nior port­fo­lio man­ager at In­come Part­ners As­set Management Ltd, which runs an RQFII bond fund.


An em­ployee at a bank counter in Nan­tong, Jiangsu prov­ince, counts ren­minbi and dol­lars.

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