Global funds to be winners from China investment change

HONG KONG (Reuters) - Global fund houses will be long-term winners from China's decision to let banks invest client money in overseas stocks, offering a new channel for the international money managers to tap into more than $2 trillion in personal savings.

The change is especially good news for global money managers that haven't already set up domestic operations in China, since they can now partner directly with Chinese banks to sell foreign equity products to Chinese investors.

"This comes as a very pleasant surprise, I suspect, to those fund management companies that either hadn't set up or weren't planning to, but now suddenly they're in there with a chance," said Shiv Taneja, Singapore-based managing director with global asset management research firm Cerulli Associates.

Chinese regulators unveiled a plan on Friday to let banks pour client funds into stocks or structured products in overseas markets for the first time, starting with Hong Kong. The news has sent Chinese shares in Hong Kong <.HSCE> to record highs.

"It's a very positive opportunity," said Ajay Srinivasan, chief executive of UK insurer Prudential Plc's (PRU.L: Quote, Profile , Research) 29.2 billion pound Asian fund business, which includes a stake in a mainland joint venture.

"Actual mechanics are not fully available, but we expect more details in the coming weeks," he said.

The change, which could help ease upward pressure on both the yuan and China's soaring stock market, is an expansion of China's Qualified Domestic Institutional Investor (QDII.L: Quote, Profile , Research) scheme launched last year.

Some $15 billion worth of QDII quota has been allocated, but analysts estimate less than $1 billion has been used because initial offerings were confined to fixed-income, so already low yields were eroded by the yuan's appreciation.

Investors also preferred to invest in China's red hot domestic stock market, which rose 130 percent last year.

Executives with Schroders (SDR.L: Quote, Profile , Research), Amvescap (AVZ.L: Quote, Profile , Research), China Southern Fund Management Co., and the joint ventures of HSBC ( HSBA.L: Quote, Profile , Research)( 0005.HK: Quote, Profile , Research), Fortis ( FOR.BR: Quote, Profile , Research)( FOR.AS: Quote, Profile , Research), JPMorgan (JPM.N : Quote, Profile , Research), Deutsche Bank (DBKGn.DE : Quote, Profile , Research) and KBC (KBKBt.BR : Quote, Profile , Research) have all told Reuters they want to launch QDII products into China.

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Industry players are more optimistic about the next round of products, which they expect to be similar to a pilot fund recently launched by Bank of China (601988.SS: Quote, Profile , Research) (3988.HK: Quote , Profile , Research).

After killing its first unsuccessful QDII product earlier this year, the bank raised 793 million yuan with its new China Stable Growth Fund that invests partly in overseas funds managed by Fidelity and Credit Agricole ( CAGR.PA: Quote, Profile , Research).

"What we anticipate is that in the next several weeks (China) Construction Bank (0939.HK: Quote, Profile , Research), ICBC (1398.HK: Quote , Profile , Research) and Agricultural Bank of China will probably follow suit with a similar product," said Peter Alexander, head of Shanghai-based fund industry consultancy Z-Ben Advisors.

Neither Fidelity nor Credit Agricole has gone through the painstaking and sometimes costly process of setting up a joint venture in mainland China, though Credit Agricole hopes to launch one later this year.

Until now, joint ventures have been the primary way for international fund houses to access China's retail investors.

But the changes are also good news for the Sino-foreign joint ventures, as it suggests authorities may be close to letting them bring their international products to the mainland, said Joseph Ngai, an associate principal with consultants McKinsey & Co.

"It's not too far away. If you allow the banks to do it, the next thing is you allow the mutual funds to do it," Ngai said.

Ngai said this would also give international fund companies and advantage over purely domestic players, because they could tap the overseas products and resources of their foreign partners.

To be sure, the changes are not expected to trigger an immediate "wall of money" for international fund houses. Initial flows may be slow as banks and fund companies grapple with the new rules. A rising yuan and strong domestic market could also cool investor demand.

Z-Ben's Alexander noted that given the wide reach and limited number of Chinese banks, international fund houses may need to be generous when negotiating fee sharing.

But he is optimistic for the longer term, predicting that a total issued QDII quota of US$95 billion by the end of 2009, when he also expects issued quota will equal invested quota.

"We are rather confident that the scheme will have become an integral part of China's investment management industry by 2009. Getting from here to there may, however, require a great deal of patience," he wrote in a recent report.