China bank liquidates foreign share fund

China bank liquidates foreign share fund

By Andrew Wood

Published: March 28 2008 01:12 | Last updated: March 28 2008 01:12

One of the few pioneering Chinese funds that allows ordinary citizens to invest in foreign shares is being liquidated because its value has fallen by more than 50 per cent since its launch six months ago.

China Minsheng Banking, the country’s first privately owned bank, sold 100m shares in the fund in October at Rmb1 each, raising $14.3m, as part of the Chinese government’s qualified domestic international investor (QDII) programme.

Since then, share prices in China and abroad have tumbled as the scale of the US credit crisis has become more apparent.

Many investors were betting that Hong Kong shares, the main destination for QDII money, would continue to rise. Optimism was stoked when Beijing also announced in August another scheme – nicknamed the “through train” – to allow Chinese individuals to buy shares in the territory directly. Many analysts expected a wall of Chinese money to hit Hong Kong as mainland investors looked for much higher returns than they could get in their bank accounts.

However, the Hang Seng index has dropped 28 per cent since it peaked in late October, and the “through train” scheme has repeatedly been postponed.

The terms of China Minsheng’s fund said it would be liquidated if its assets fell below half of their initial value or rose more than 18 per cent.

“It’s the first QDII equity fund to be liquidated,” said Peter Alexander, head of Z-Ben Advisors in Shanghai, which analyses China’s fund management industry. However he said the Bank of China had abandoned a money market fund in the early days of QDII when such funds could not invest in shares.

The liquidation of the fund was not completely surprising, given the experimental nature of the QDII programme and the way many people have been “caught off guard by the extent that the global contagion has been spreading”, he said.

“With Minsheng, you have a good regional bank that was trying to get into the market. But it didn’t have the necessary investment experience, let alone international expertise,” he said.

The first QDII equity funds, launched last year after the government loosened regulations on overseas investment, were oversubscribed.

Demand for the latest funds, launched in January by the Industrial and Commercial Bank of China and Credit Suisse, and by China International Capital Corporation in February, was muted as share prices sagged. Recent figures show net asset values of QDII funds have fallen 15-40 per cent.

Mr Alexander said he thought the QDII scheme was still very much “alive and twitching” although going through a process of evolution. One lesson to be learned was that mainland institutions needed outside expertise to make QDII work.

“The vast majority of success [in QDII funds] will come from fund management companies and not the banks,” he said.