New funds to offer higher profits at greater risk

Market predicts securities linked to Hong Kong index will be introduced by end of the week

This week is likely to see the introduction of new exchange-traded funds that invest in Hong Kong shares, giving rise to expectations of higher profits among investors, a securities company executive said.

"The funds will debut on the Shanghai and Shenzhen stock exchanges before June 30," Yan Feng, vice-chairman and CEO of Guotai Junan International Holdings Ltd, said on Monday. He said the China Securities Regulatory Commission has approved the introduction.

He declined to disclose the exact date they would debut. Even so, the market predicted that the exchange-traded funds may be introduced on Friday, before President Hu Jintao arrives in Hong Kong to attend a celebration held in honor of the 15th anniversary of the Hong Kong Special Administrative Region.

"This will be good news for the Hong Kong stock market, which has been influenced by the gloomy global economy in the first half of the year," Yan said, saying a large influx of money from the Chinese mainland may boost investors' confidence.

The new funds' profits are expected to exceed the earnings that can be made by all other investment securities available to Chinese brokers in Hong Kong, making it likely that the competition among those market players will be fierce, Yan said.

So far, the China Asset Management Co Ltd and E Fund Management Co Ltd have proposed two exchange-traded funds that will rise and fall according to the Hang Seng Index, which reflects the prices of stocks on the Hong Kong exchange. They will be the first such products offered in China.

The introduction of exchange-traded funds for Hong Kong shares will give mainland investors more investment channels, even though the Chinese government is still keeping tight controls on cross-border flows of capital, analysts said.

The funds should be operated under the same arrangement that governs qualified foreign institutional investors and qualified domestic institutional investors, the securities regulatory commission said.

Similar to other QDII products, the new cross-border funds will carry high risks and will be better suited to professional and high-end investment groups and institutions, said Yu Sijia, analyst from the Howbuy Fund Research Center, a Chinese fund investment strategy study institution.

"Many Chinese domestic securities companies have called on the securities regulatory commission to increase the QDII and QFII quotas and lower the investment thresholds to further add to the capital pool," Yan said.

Bosera Asset Management (International) Co Ltd, China Southern Fund Management Co Ltd and the Harvest Fund Management Co Ltd are also preparing to introduce cross-border fund products.

The securities regulatory commission is moving more quickly to approve QFII quotas and making plans to increase the QDII quotas. The goal of those steps is to attract foreign capital and to increase the number of overseas investment opportunities for domestic investors.

By the end of last week, 172 foreign investment institutions had received licenses to conduct QFII business.

Of those, 145 have been permitted to invest up to $27.2 billion in total in China, a statement from the securities regulatory commission said.

From December 2011 to the present, the top regulator has approved 51 new QFII licenses, giving foreign investors permission to invest up to $5.62 billion in the country, the statement said.

Last Wednesday, the commission announced plans to allow QFIIs to hold as much as 30 percent of the shares of domestic companies, up from 20 percent, and allowed such investments to go into the Chinese inter-bank bond market.

"In the next stage, we will raise the investment quota cap from the current $1 billion," a commission official said.

According to the State Administration of Foreign Exchange, 98 domestic investment institutions had received permission by April 16 to invest up to $76.4 billion in overseas markets.

chenjia1@chinadaily.com.cn