PRC investment flows offshore near $20 billion

Although China has yet to decide on whether or how to introduce a qualified domestic institutional investor (QDII) scheme - a result that fills the dreams of global money managers - many mainland institutional investors have become quite active global investors through structured products arranged by foreign investment banks.

"PICC has given out a bond mandate and Ping An Life and China Life are looking," says one Shanghai-based executive at a foreign bank, referring to three of China's biggest insurance companies. "Commercial banks are already active in global fixed income, and state-owned enterprises with foreign currency are also investing through Hong Kong-based or offshore-based structures. Now the investment trust companies are also looking."

Estimates vary, but bankers believe this structured market for mainland firms may have grown as large as $20 billion. Mainland investors have two channels: they can invest foreign currency reserves or wire money abroad, in order to buy investment products or hand out investment mandates; or they can structure products with mainland-based banks.

"It began as structured deposit products, just like in Taiwan three years ago," says a banker in Shanghai, who adds that the first of these appeared in 2004. "The first products were linked to our Treasury desk, and included Libor-linked structured notes, range-accrual products and currency-linked notes."

Now these products are evolving into investment-related products introduced by the likes of SG and Deutsche Bank, which reportedly are selling structures linked to fixed income funds; and ABN Amro, which has linked structures to global emerging-market funds. These products must be packaged ultimately as a structured deposit for the end user.

The market evolved a further step last year when the Chinese Banking Regulatory Commission (CBRC) and the State Administration for Foreign Exchange (SAFE) reportedly gave Standard Chartered the green light to introduce a structured note linked to equity, in this case the S&P500 index. These treasury products tend to be very short term, less than one year in duration. They provide a yield above a deposit, but they deny the investor any right to redeem while giving the investment bank an option for early termination.

Some of the more recent notes have extended tenure a bit and may guarantee an annual coupon at 1-2%. Citibank and HSBC are other typical providers, but the business is not limited just to foreigners - Bank of China is reportedly providing these structures to mainland institutions or high-net-worth individuals with overseas funds, while the more nimble banks such as China Merchants and Minsheng Bank are said to be at the cutting edge of product innovation.

Increasingly, the foreign banks' offshore desks are cooperating with local banks to sell products through a local network.