Japanese investors get first crack at A shares

Japanese investors will get their first opportunity to invest in China's A-share market when Nikko Asset Management launches its Koga (Yellow River) Fund in February. Nikko AM says it is the first qualified foreign institutional investor to launch an open-ended mainland equities fund denominated in yen but invested in renminbi-based shares.

Nikko has always been active in the Chinese market, introducing Japan's first B-share equities fund 10 years ago, according to a senior official in Tokyo. Currently the firm is emphasizing its Chinese equity focus for institutional and high-net worth investors.

Last year it won a $50 million QFII quota from the Chinese Securities Regulatory Commission, which has been fully invested in a closed-end fund of Chinese government bonds. Nikko says this makes it the first asset management company in the world to be so qualified. The CSRC, pleased that Nikko fulfilled its quota when others have not, has recently broadened its quota by another $200 million - the ultimate size of the Koga Fund, the firm hopes.

Although open-ended, the fund will be closed for its first year, with monthly redemptions available thereafter. Scarcity allows Nikko to charge a high 2.10% management fee plus a performance fee if returns exceed 15%.

For now the Koga Fund will be managed from Tokyo but Nikko AM plans to open an office in Shanghai to support it, although executives declined to say when this was likely. Nikko will also rely on its Chinese domestic brokers and its custodian for support, although Nikko officials declined to name thesm The firm is also exploring research alliances with mainland-based fund management companies.

China should appeal to Japanese institutions because its credit rating is now on par with Japan's, its equity markets enjoy a low correlation to those in the United States and Japan, and China's sustained rates of economic growth.

Nikko AM manages Y6.2 trillion ($65 billion) in assets.