Two houses first to be picked for extra RQFII bond quota

The Hong Kong arms of China Asset Management and E Fund Management have become the first to be granted additional quota for their RQFII fixed income products.

The two houses were each granted an extra Rmb800 million by the State Administration of Foreign Exchange (Safe) last Friday, taking their funds to Rmb2 billion and Rmb1.9 billion, respectively.

They are now in the process of updating investment notes and prospectuses for China AMC Select RMB Bond Fund and E Fund RMB Fixed Income Fund. This is expected to take several days, with subscription expected to resume as soon as this week.

Initially Safe granted Rmb20 billion in total quota for renminbi-denominated qualified foreign institutional investors (RQFIIs) at the end of 2011, with guidelines that no less than 80% could be invested in fixed income and no more than 20% in equity.

The allocation has since been distributed to 21 RQFII licence holders, with fund houses receiving Rmb1.1 billion (apart from China AMC, which was handed Rmb1.2 billion) and securities firms getting Rmb900 million each.

Additional RQFII quota of Rmb50 billion was signed off last April, when qualified providers were permitted to issue A-share ETF products for the first time. Further, last November the China Securities Regulatory Commission (CSRC) announced it would expand its RQFII programme by an additional $200 billion.

Industry sources note that the regulator has sought to reallocate some quota from RQFII ETFs to fixed income funds. However, there is no suggestion that the release of these two new quotas implies that the RQFII programme is set for a third round of product expansion, with regulators understood to be discussing the details still. 

When it comes to awarding additional quota for RQFII bond funds, Safe will only endorse such a move if managers have used all of their existing quota. Performance of the fixed income fund is also taken into account.

In the 10 months since launch to the end of last year, the China AMC Select RMB Bond Fund had returned 4.31%, while the E Fund RMB Fixed Income Fund delivered 5.44%.

Jack Wang, managing director at rival house CSOP, confirms that it, too, is interested in applying for additional RQFII quota since it has almost used up its initial Rmb1.1 billion quota. Its Shen Zhou RMB Fund has returned 4.72% according to Bloomberg data.

Freedie Chen, a managing director for China AMC (HK), says Asian institutional investors have shown strong appetite for RQFII bond funds as a diversification play.

“For the same issuers the yield for an onshore bond is slightly better than a dim-sum bond,” he notes. “Moreover, the dim-sum bond market is still in a development stage where liquidity is not very good.”

China AMC confirms it is talking to banks about the retail distribution of its additional quota. The retail channel accounted for 95% of subscriptions for its initial quota.

E Fund is taking a similar path through its existing distributors. Alex Sun, its executive director of business development, says demand from retail investors is strong in anticipation that the renminbi will resume its appreciation path.

Institutional investors from Taiwan and Korea are also understood to have expressed interest in subscribing to E Fund’s RQFII bond fund.

Jun Ma, CIO for fixed income, notes that the bond fund had virtually no equity holdings last year, although in 2013 he says it will adjust investment strategy according to prevailing conditions.

Looking ahead, Ma estimates the yield for RQFII bond funds in the market this year will be 3-5%.