By Robin Kwong in Hong Kong and Jamil Anderlini in Beijing

China Southern Fund Management will this month become the first Chinese fund house to invest its clients’ money in overseas stocks, as the liberalisation of China’s domestic funds continues.

The company, one of the three biggest fund managers in China by assets, is the first to take advantage of a June decision by Chinese regulators to expand the scope of the Qualified Domestic Institutional Investor (QDII) scheme, which allows capital outflows through banks, brokerages and fund houses.

Fund managers with QDII quotas were previously only allowed to invest in bonds and fixed-income products, which made it difficult to generate high returns given China’s policy of steadily appreciating the yuan. Some commercial banks were earlier given QDII quotas that allow them to launch products that invest up to 50 per cent of proceeds into stocks.

This expansion of the QDII scheme will encourage a further $10bn-$15bn outflow of capital in its initial stages, said Citi Investment Research China strategist Xue Lan. Four other fund firms, including JPMorgan’s China asset management venture, are setting up similar funds.

China Southern Management’s fund will invest in 10 overseas equity markets, including the US, Japan, India and Hong Kong. ”By investing in 10 countries we can spread risk and reduce losses related to the appreciation of the Rmb,” said chief executive Gao Liangyu.

“The government has given us complete freedom when it comes to the size of this fund, as they want as much money to leave the country as possible,” he added. “The level of interest will decide how big this fund is.” The fund will be launched on September 12 and subscription closes on September 28.

Beijing has been stepping up measures to encourage greater outflows and give more investment alternatives for domestic investors as liquidity continued to pour into the Shanghai stock market. It last month announced a pilot scheme giving retail investors direct access to Hong Kong’s stock market, which has been inaccessible because of China’s currency controls.

Ms Xue said domestic investors would likely use QDII stock funds like China Southern’s to diversify their investments. “One doesn’t always invest just for returns. This fund offers different angles and exposure to investors,” she said.

Copyright Fund China 2009.

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