The first Chinese fund manager to launch a fund exclusively to invest in overseas equities had to ask the regulator to double its allowance to US$4 billion in September in response to massive demand. Total subscriptions for China Southern Fund Management’s Qualified Foreign Institutional Investor (QDII) fund came to over US$5.3 billion.
The fund differs from the products offered by commercial banks as it is permitted to invest all of its assets in stocks, as opposed to just 50%. Other fund firms are likely to roll out similar products, tapping into the country’s potentially huge demand base for overseas stocks.
The domestic markets are still running at full throttle, shrugging off whatever ill effects the September 14 interest rate hike might have had. On September 17 – the Monday following Friday’s rate increase – the Shanghai Composite Index (SCI) rose 2% to reach a new record high of 5,421.39.
While this might convince many investors that the real riches are to be found at home not overseas, the fact that domestic share prices have risen fivefold in less than two years has led analysts to warn of a growing asset bubble. Investing overseas is a useful means of diversification – albeit not to the extent that some predict.
However, the landmark move to allow individual investors to buy Hong Kong stocks remains on hold. A month after the “through train” initiative was announced, regulators were still undecided on how the system will work.
It was claimed that the State Council fears capital will be hemorrhaged from the mainland markets – effectively an overcompensation of the liquidity drainage it wants to achieve. Therefore, it is unlikely that the scheme, which is to begin at Bank of China branches in Tianjin, will stretch beyond a few pilot cities, at least in its initial stages.
Nevertheless, expectations of new inflows served to drive the Hong Kong stock market to new highs. As of mid-September, the Hang Seng Index was approaching 25,000 points.