Deutsche, Amundi set for bigger share of yuan funds pie

Reuters

HONG KONG, Dec 4 (Reuters) - Global fund managers arereaching outside Asia to tap growing demand for Chinese assetsafter authorities relaxed investment restrictions to promote theinternational use of the yuan.

Chinese asset manager Harvest Global Investments recentlypartnered with Deutsche Asset & Wealth Management to list anexchange-traded fund (ETF) in the United States under a growingyuan-denominated investment scheme offering U.S. investorsdirect access to China's A-share market for the first time.

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

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

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

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

ETFs offered under a yuan-denominated investment schemelaunched in 2011 - called the Renminbi Qualified ForeignInstitutional Investor (RQFII) - is preferred more by investorsthan ETFs launched under its older cousin - the QualifiedForeign Institutional Investor (QFII) - started in 2002.

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

COMFORT INVESTMENT

"U.S. investors have historically shown a strong interest inphysical ETFs and a majority of ETFs in the U.S. are physicalones. It offers a higher level of comfort," said Deutsche'sMontanari, who is speaking with regulators to list its firstRQFII ETF in Europe.

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

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

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

"RQFII ETFs are quite active recently as foreign investorsare optimistic on China's economic outlook and determination toconduct reforms," said Ben Kwong, chief operating officer atsecurities firm KGI Asia.

An ambitious reform blueprint unveiled last month hastriggered a rally in the offshore Chinese markets and promptedforeign asset managers to look favorably at China with somefunds 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 theirfunds, with JPMorgan Asset Management and Value Partnersreportedly also planning similar moves.

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

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