- Assets of bond funds allowed to buy offshore expand 63% in '15
- Three new QDII bond funds raised $529 million from Dec. 30
China’s best-performing fund manager specializing in overseas investment said the yuan’s rebound won’t last and that will help lure cash into dollar bonds.
“The yuan still faces forces that may cause it to depreciate,” said Qiu Wei, who oversees the GF Asia High-Yield Bond Fund that gained 18.3 percent in the past year, the most among the 140 Chinese funds allowed to invest abroad. The currency could weaken as much as 3 percent against the dollar within 2016 from the end of 2015 as the U.S. may raise interest rates twice, while China maintains monetary easing to spur economic growth, according to Qiu at asset manager GF Fund Management Co.
While the yuan has gained 2 percent against the greenback from a five-year low in January, the currency has still weakened 2.6 percent against a basket of 13 currencies. China will probably report economic growth slowed to 6.7 percent in the first quarter from 6.8 percent in the previous three months, according to a Bloomberg survey of economists, putting further pressure on the central bank to take more steps to avoid worse cooling.
The amount of assets managed by Chinese overseas fixed-income funds through the qualified domestic institutional investor scheme swelled 63 percent last year to 3.9 billion yuan ($604 million), according to data compiled by Shanghai-based research firm Z-Ben Advisors. Three new QDII funds raised a total of 3.43 billion yuan in the past three months, following a two-year of halt in issuance of such products, data compiled by researcher Howbuy showed. UBS SDIC Fund Management Co., a UBS Group AG joint venture in China, plans to complete raising money for its new overseas bond fund on April 15.
Downtrend to Resume
The Chinese currency will depreciate to 6.70 per dollar by year-end, from around 6.46 Tuesday, according to the median estimate in a Bloomberg survey.
"The yuan won’t go back to an appreciation path until the economy bottoms," said Guangzhou-based Qiu at GF Fund Management Co. "But the yuan won’t undergo any large-scale depreciation like the Indian rupee or the Russian ruble because the Chinese economy is far better than other emerging-market nations.”
In a sign of mounting demand for dollar debt from China, the nation’s corporate notes in the currency returned 1.47 percent in March, the most since October, according to Bank of America Merrill Lynch indexes. By contrast, yuan bonds advanced only 0.58 percent in the same month.
“We will see more QDII bond funds in China because investors prefer investments in fixed-income dollar products which can generate stable returns,” said Qiu.
HuaAn Fund Management Co. raised 1.5 billion yuan for its HuaAn Global Dollar Income Bond Fund on March 23. Bank of China Asset Management Co. started its 876.9 million yuan QDII bond fund on Dec. 30. China Southern Asset Management Co. raised 1.058 billion yuan for a similar fund on Feb. 26.
Qiu said he prefers utility and healthcare bonds among notes of non-Chinese corporations and favors property, financial and consumer companies among Chinese firms’ bonds.
“We are also investing in investment-grade dollar bonds in other nations, such as in Southeast Asia or Australia,” said Qiu. “We may do some research on U.S. high-yield products.”
Harvest Fund Management Ltd., the nation’s fifth-largest fund manager, said it may add more people to an overseas team of seven as Chinese demand for dollar bonds increases.
The State Administration of Foreign Exchange has approved 132 local institutions to invest as much as $89.99 billion in offshore assets via its QDII program and the new funds were launched using unused quotas. SAFE hasn’t granted any new allocations since March 2015.
“We will see more QDII bond funds being set up,” said Thomas Kwan, chief investment officer at the Hong Kong subsidiary of Harvest. “But the development of the industry will be limited by quotas.”
— With assistance by Judy Chen