The yuan-denominated investment products development in Hong Kong has elevated to another stage, as the traditional yuan deposit product range has expanded from yuan-denominated insurance and bond investment into yuan-denominated exchange-traded funds (ETFs) trading and even yuan currency futures.

The Hong Kong Exchanges and Clearing Ltd (HKEx) on September 17 will launch the city's first deliverable yuan currency futures contract based on the yuan and the US dollar exchange rate. The futures will be traded on the local bourse providing a new offshore risk management tool for hedging yuan currency risk.

"The product can endow mainland institutions, qualified foreign institutional investor (QFII) fund managers and mainland and overseas companies engaging in cross-border trade settlements as well as foreign institutions who want to make direct investment on the mainland an investment tool for hedging yuan currency fluctuation risk," HKEx Trading Division Head Calvin Tai said.

In addition to the derivative front, yuan-denominated ETF trading also made its debut and received favorable market response in the city when the China Securities Regulatory Commission (CSRB) in April 2012 approved the use of the RQFII investment quota of 50 billion yuan ($7.90 billion) for qualified mainland fund management houses and brokerage firms to issue yuan-denominated exchange traded funds (ETFs) tracking A-share indices. Currently there are four yuan-denominated ETFs listed locally that has 11 billion yuan asset under management.

"ETF investments in the A-share market may be attracted to those aggressive investors (who) chase for higher returns and who perceive A-shares to be undervalued after the recent downturns," Centaline Wealth Portfolio Manager David Leung told China Daily.

However, the other RQFII investment funds drew tepid market response. The Securities and Futures Commission in Hong Kong has authorized 19 RQFII funds provided by 21 mainland brokerage firms to deal with such products. Since these products were launched in January this year, it is estimated that only about 10 billion yuan has been raised or representing about half of the allocated quota of the 20 billion yuan. In addition, investmetns are restricted to a mix of 80 percent in bonds and 20 percent in equities on the mainland.

"I think RQFII fund investment still has market potential and the current lukewarm market response may be due to the limited marketing channels of the distributors," said Steve Chiu, managing director of Bosera Asset Management (International) Co Ltd, one of the RQFII investment fund providers.

"The RQFII investment funds may only yield the same return levels similar to yuan deposit rates after deducting the investment charges diminishing its attractiveness, not to mention there are still investment risks associated with these products" Centaline's Leung added.

Under Secretary for Financial Services and the Treasury Julia Leung said that the Hong Kong government in its routine communication with the CSRB, has raised the issue of raising the current RQFII investment quota amount, and also to relax the current investment mix restriction, and permitting more Hong Kong-based financial institutions to be included in in the RQFII investment quota.

oswald@chinadailyhk.com

(HK Edition 09/15/2012 page2)