Australian investors risk lagging behind their global counterparts in gaining exposure to China, global asset manager AllianceBernstein said today when announcing it had received a licence under the Chinese government’s Renminbi Qualified Foreign Institutional Investor (RQFII) scheme.
The firm, which already manages a number of China investment funds, also said that it would launch three more as an initial result of receiving the RQFII licence.
Two of AllianceBernstein’s Hong Kong-based portfolio managers—both Australian nationals—noted that, while China continued to make historic strides in opening its capital markets to foreign investment, Australian private investors to date had been relatively slow to take advantage of the opportunity.
“Australia’s regulatory and political institutions understand the significance of the changes taking place, as evidenced by the launch in July of the Australian Securities Exchange’s Chinese currency settlement service and the October 2012 publication of the Australia in the Asian Century government white paper,” said Stuart Rae, Chief Investment Officer of Asia Pacific ex Japan Value Equities.
Hayden Briscoe, Director—Asia Pacific Fixed Income, pointed out that the Reserve Bank of Australia (RBA) holds around 3% of its net foreign exchange reserves in renminbi (RMB) and has a bilateral currency swap with the People’s Bank of China (PBOC), with which it is in discussions about the establishment of an RMB clearing bank in Australia.
“A senior RBA official said recently that the internationalisation of the RMB and the liberalisation of China’s capital account could ‘well turn out to be one of the seismic events in global capital markets over the coming years1’,” said Briscoe, “and yet this message has not really permeated the consciousness of most Australian investors, in our view.”
AllianceBernstein has been managing dedicated China investment vehicles since 1998 when it launched the China Opportunities Fund—originally known as the Greater China Fund—which invests in offshore- listed Chinese companies and companies affected by economic developments in China.
After receiving a Qualified Foreign Investment Institution (QFII) licence in 2008, the firm launched the China A Shares Value Fund and China Bond Fund. The QFII scheme allows foreign investors to trade RMB- denominated “A” shares on the Shanghai and Shenzhen stock exchanges, and bonds on the listed and interbank markets.
Independently of the QFII scheme, the firm launched an RMB Income Plus Fund in 2011 which, said Briscoe, is the top performer in its category. The Fund, which allows investors to participate in RMB appreciation while diversifying risk beyond RMB bonds, has won several awards for product design.
RQFII takes the QFII licensing scheme a stage further, by allowing non-Chinese financial institutions in Hong Kong to launch RMB-denominated funds for investment in mainland China. Briscoe and Rae said the firm planned two fixed-income funds and an equity fund as a result of receiving the RQFII licence. All three would be domiciled in Luxembourg and accessible to Australian and other investors.
The portfolio managers said that RQFII and the internationalisation of the RMB were important steps to China becoming a global investment market, and that the firm’s platform of China funds would capitalise on what Briscoe described as a “once-in-a lifetime development with profound implications”.
“China’s government bond market is already the third-biggest in the world and will account for an estimated 12% of global bond indices when included within them, forcing investors to make significant portfolio adjustments just to stay market-neutral,” he said.
“The country’s reforms are creating significant new investment opportunities in equities,” said Rae. “One of the most interesting currently is the restructuring of the state-owned enterprise (SOE) sector, where privatisations and other changes point towards improving profitability for SOEs.”
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