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Bonds all the way for Bosera International

Category: China, Hong Kong

MD highly optimistic on RQFII scheme succeeding

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Bosera Asset Management (International) launched its first RMB qualified foreign institutional investor (RQFII) fund, the Bosera RMB Bond Fund, on January 18. Steve Chiu, the company’s managing director, describes the way in which the product was constructed and gives his opinion on how the RQFII market is shaping up in an exclusive interview with Asia Asset Management.

Asia Asset Management: What attracted Bosera International to the RQFII scheme in the first place and how did the firm go about persuading the regulators that it was a worthy participant?

Steve Chiu: Our RQFII vision began to take shape a year-and-a-half ago when we submitted our proposal to the China Securities Regulatory Commission (CSRC). When we became aware of the requirements for the RQFII program, we proceeded to invest an enormous amount of time putting together the necessary documentation and complying with the legal obligations. Product approvals were to be finalised prior to the regulator making the details of the scheme public in mid-December last year. After that, we were busy to working on our submission to the CSRC for RQFII qualification and to the State Administration of Foreign Exchange for the quota. These procedures were completed in a couple of weeks. We subsequently worked with Hong Kong’s Securities & Futures Commission (SFC) very closely and obtained our approval from them on January 5 this year.

How does Bosera International go about differentiating its RQFII fund from other the other RQFII products being launched into the market?

The current rules stipulate that a minimum of 80% of RQFII products must be invested in bonds and a maximum of 20% in equities. But in fact, there is some room for manoeuvrability. Our product is 100% focussed on China’s bond market, when investors invest in our RQFII fund, their capital will be committed entirely to steady, relatively low-risk bond markets, and not the more volatile equity market.

Please describe the composition of the fund’s bond portfolio?

We want to maintain a level of flexibility. If you look at the entire China bond market, the yield is attractive. For instance, the yield for corporate six-month deposits is about 5.5% which could be a good choice for the portfolio construction. Also, the Chinese bond market is constantly changing; we don’t want to be tied down to any particular bonds. As long as our portfolio is built with high investment grade and highly rated bonds, I think that’s good enough.

What is the split between retail and institutional investors for your RQFII products?

We now only have one share class which applies to all investors. Our predominant distribution channel is through local distributors. We’ve secured around ten distributors including retail banks, private banks and financial intermediaries. We don’t have any preset split between retail and institutional investors. We go for the retail first, but we have also received good responses from the institutional side. The problem is we don’t have an unlimited quota, so we have to carefully balance the two sides. As the Hong Kong subsidiary of a Chinese fund manager, I think the RQFII product is a good opportunity for us to expand our local presence, brand awareness, and distribution network.

In terms of managing risks, how do Bosera International fund managers go about this in regard to the RQFII product?

RQFII products are subject to interest rate risk, credit risk, policy risk, and liquidity risk. In terms of investing into China’s local markets, the fund relies a lot on the investment management expertise of our onshore fixed income team based in headquarter Bosera, one the first Chinese fund managers to gain approval from the regulators to launch bond funds and manage bond mandates – so we are very experienced in managing onshore bonds. In terms of managing risks, we operate a very systematic and stringent process internally and our credit analysis abilities in China are at the top end of the market. We have a deep understanding of China’s economy, which will in turn be of great benefit to our investors.

What are your thoughts on the second phase of the RQFII scheme?

The current RQFII scheme is a pilot, which means that it can be replicated for international markets. We expect that the second batch of RQFII will come in different forms, other than just bonds and equities. Bosera International received 1.1 billion yuan (US$174 million) worth of quota in the first batch of RQFII, which we believe can be fulfilled in a short period of time. Once this has been exhausted, then the next step for Bosera International is to apply for an additional allocation for the current fund or for a new RQFII fund.

Going forward, how do you see the RQFII market developing?

The RQFII market will definitely grow because of the trend towards RMB internationalisation. It will also expand in terms of investment. Given the limited availability of RMB investment tools in Hong Kong, the RQFII scheme can provide another channel for investors. Also, the initial RQFII quota is minute compared to the size of the Mainland bond market (at roughly 1 trillion yuan), which makes me think that the potential for RQFII products to succeed is very strong.

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