China Will Boost Funds Investing Overseas to Curb Yuan Gains, Z-Ben Says

China will boost the number of mutual funds that can invest overseas next year, spurring inflows into other emerging markets and slowing the yuan’s appreciation, according to fund research companies Z-Ben Advisors and Howbuy.

The number of funds investing in global stocks and bonds under the qualified domestic institutional investor, or QDII, program, may reach 60 by the end of next year, compared with as many as 26 this year and nine in 2009, according to Z-Ben, a Shanghai-based consulting firm that provides research to fund management companies.

“We should be expecting to see more QDIIs,” said Andy Mantel, Hong Kong-based managing director of hedge fund Pacific Sun Investment Management Ltd. “They have huge potential and are building quality the right way.”

The increase represents a turnaround for QDII, which was started in 2006 to help domestic money managers diversify their risks by investing abroad. Investors lost as much as half their money when the funds plunged during the global financial crisis, forcing the government to slow approvals, said Francois Guilloux, regional sales director at Z-Ben.

“The regulators are opening the doors to allow more QDIIs to alleviate pressure on RMB liquidity and develop local fund management talent to avoid a repeat of 2007, when funds crashed during the financial crisis,” said Guilloux. Z-Ben compiles data based on public disclosures from fund management companies and regulators.

A call made to Xia Lihua, a spokeswoman for the China Securities Regulatory Commission, went unanswered.

China’s regulators had approved domestic fund management firms, brokerages and banks to sell a combined $64 billion QDII funds as of July. That’s a tiny proportion of China’s foreign- exchange reserves, which reached a record $2.65 trillion in September and has constantly prompted criticism from the U.S. for artificially undervaluing its currency.

Emerging Markets

Guilloux said QDII funds are diversifying to other emerging markets and Asian countries from mainly Hong Kong. The nation’s mutual funds had a combined loss of 351.4 billion yuan ($51.8 billion) in the second quarter, the third-biggest quarterly loss, as the nation’s stock market slumped the most in Asia, TX Investment Consulting Co. said in July.

Investment strategists at Bank of America Corp., Credit Suisse Group AG and Societe Generale SA have all said in the past two weeks that emerging-market stocks may climb above levels justified by companies’ assets and earnings because of surging economic growth and U.S. government efforts to reduce yields on debt securities.

The MSCI Emerging Markets Index has gained 15 percent this year, while China’s benchmark Shanghai Composite Index has fallen 7.5 percent even after a 28 percent rebound from this year’s low on July 5.

‘Growing Demand’

China International Priority Equity Fund has a return of 14 percent this year, the most among China’s QDII funds, according to data compiled by Bloomberg. The fund is managed by a local venture with JPMorgan Asset Management.

“There’s a growing demand from China’s households to diversify their asset allocations and QDII funds have filled the niche as channels for domestic investment are still limited,” said Yuan Fang, an analyst at Shanghai-based Howbuy, a data compiler for China’s mutual fund industry. “It also helps to remove some pressure on the yuan.”

The yuan has climbed 1.8 percent since China’s central bank ended a two-year dollar peg on June 19 as investors bet an economic recovery and trade disputes with the U.S. will force the government to allow for faster appreciation.

--Zhang Shidong. Editors: Allen Wan, Reinie Booysen

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at +86-21-6104-3040 or szhang5@bloomberg.net

To contact the editor responsible for this story: Linus Chua at lchua@bloomberg.net

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