QFII lives up to expectations
(China Business Weekly)
Updated: 2004-07-12 13:41

Editor's note: On July 9, 2003, UBS, one of the world's leading financial service firms, placed its first order in China's A-share market, blazing a trail for the qualified foreign institutional investor (QFII) scheme, which allows foreign institutional investors to trade in the country's US$500 billion capital market.

Up to now, 16 foreign financial institutions have won approval to invest in China's main stock and debt markets under the QFII scheme with New York-based Lehman Brothers Holdings Inc coming the latest.

To mark the first anniversary of the QFII's implementation, China

Business Weekly staff reporter Zhao Renfeng last Friday interviewed Nicole Yuen, head of UBS' China Equities, on UBS' one-year performance under the QFII system and the QFII's role in China's fledgling capital market.

The following is the interview in question-and-answer format:

Q: How do you look at the UBS' one-year performance in China's capital market under the QFII scheme? Are you satisfied with UBS' decision in investing in the A-share market?

A: I am very happy at the moment. It has been proved that investing in the China market is a right decision. One year ago, UBS placed its first order, picking four A shares --Baoshan Iron & Steel, Shanghai Port Containers, Sinotrans Air and ZTE Corp.

Now, UBS is trading more than 80 shares in the stock market.

About 60 to 70 per cent of the money is invested in A shares, 10 to 20 per cent in convertible bonds, about 10 per cent in closed-end and open-end funds and less than 10 per cent in Treasury bonds.

All of our clients are committed to the long-term investment opportunities with Chinese stocks. So we are not worried about short-term market performance, either up or down.

We always pay much attention to companies' fundamentals first -- such as their corporate governance, transparency and accounting credibility. Then we come to their price levels to see whether the timing is good to invest. Our aim is to outperform the market's benchmark index.

We are also noticing the A-share market has its own problems, some coming from its historical legacy. But we understand there are some very good stocks in the A-share market.

Now, UBS represents about 40 foreign institutional investors to trade China's shares.

The State Administration of Foreign Exchange granted UBS the initial quota pool of US$300 million and then extended the quota last October to US$600 million, the biggest approved by the authorities so far.

We applied for a new QFII investment quota in February to US$800 million, the maximum QFII volume the Chinese authorities would allow. We are still waiting for approval.

Q: However, there are also reports that some foreign financial institutions did not use up their quota after gaining approval from the government. They appear very hesitant to invest in China's capital market. How do you look at their decisions?

A: I also noticed some media reports about this issue. I think that's mainly because some financial firms did not work well in promoting China's shares to their overseas clients. Thus, their clients don't understand well China's market.

UBS has been paying great attention to enhancing its research capabilities. We have a strong research team on China. Some are focusing on China's economy, some on investment strategy and others on precise analysis of specific industries and companies. We hope to provide professional value-added services to our clients.

In communicating with foreign investors, we know they are very interested in investing in China's capital market.

Q: Does UBS represent any foreign-registered Chinese companies under the QFII scheme?

A: We don't welcome these firms and would not accept them as our clients. We are very serious in choosing our clients and we understand that the aim of the QFII scheme is to introduce overseas investors. We don't welcome these roundabout investment plans.

Q: China's efforts to cool down some overheated sectors affected market performance in the past several months. How do foreign investors react to the government's tightening policies?

A: It is clear that the government's new measures to cool down overheated sectors have produced effects on foreign investors' decisions in investing in China's stock market. But I think their enthusiasm in China's market will not wane. Some investors aiming at those overheated sectors are becoming cautious. They are heeding the government's hints. This is common all over the world.

Q: There has been lots of discussion on the real effect of the QFII on the nation's capital market. While some are positive, some people challenge that even with further liberalization of investor restrictions through the QFII system, the steps taken by the government are unlikely to have much effect on improving the local capital market. How do you now analyse the QFII's role in the nation's capital market, one year after the system was implemented?

Q: I think QFII has played a very important role in the nation's capital market. In terms of UBS alone, our daily transaction volume stood at sometimes up to 4 or 5 per cent of the total in Shanghai or Shenzhen.

We also have close contacts with local fund managers and introduce to them the concept of long-term investment, which I think, is very important for the healthy development of stock markets.

According to our own experience, foreign investors learned much about China's stock market in the year.

One year ago, when I met them, few of them knew what A shares and H mean and what are the differences between them. But now, many of them know specific issues related to China's stock markets.

Q: Compared to the QFII system, the QDII (qualified domestic institutional investor) scheme is also on the cards. How do you forecast the outlook for the QDII scheme?

A: I think this is a very important and urgent step for China. The sooner, the better.

As for domestic institutional investors such as social security funds and insurance funds, there are no major obstacles now because they have a strong financial base and affluent human resources, and they are well regulated by the government.

In terms of fund managers representing retail investors, conditions are not mature yet and there are still some complicated issues.

But the nation still needs to push forward the QDII system because China's securities professionals need to experience overseas markets, which are very sophisticated and different from domestic markets. Foreign consultants are not enough. They need to learn by themselves.

It is an urgent task as the long-term trend will be that the domestic markets become more integrated with international markets.

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