China’s First Wholly Foreign-Owned Fund to Focus on Bonds

(Beijing) — Fidelity International became the first foreign firm to launch a private fund in China on Friday, breaking new ground in a tightly controlled financial products and services market that previously limited foreign ownership of such funds.

Fidelity China Bond No. 1 Private Fund will invest primarily in the mainland bond market and target institutional and high-net worth investors, according to a company statement.

At least one investor, an affiliate of Fidelity International, is already on board with the firm’s strategy to test new products in overseas markets, said Li Shaojie, managing director for the Fidelity International China region.

“We want to make sure the investment strategy and risk management practices are effective before offering the product to eligible investors,” Li said. “This is the first time for us to enter the Chinese private fund market, so we will be cautious.”

The China Securities Regulatory Commission and the Asset Management Association of China granted a private fund management license to Fidelity International’s Shanghai-based wholly foreign-owned enterprise on Jan. 3. According to regulations, private fund managers must issue their first product within six months of registration.

The firm’s decision was set against the backdrop of turbulence for the Chinese bond market late last year. The period was marked by heavy capital outflows and a default scare involving entrusted bond holdings.

Li said his firm is upbeat about the long-term prospects for China’s bond market, adding that Fidelity has gained experience in the market by investing in mainland bonds for its own portfolios through the Qualified Foreign Institutional Investor (QFII) program.

Fidelity International has a $1.2 billion investment quota in QFII, through which eligible foreign institutions can buy products in China’s financial markets.

“We will take Fidelity’s investment-research method to the Chinese market,” said Li, adding that the firm will also take into account the market’s unique characteristics.

Fund manager Freddy Wong, a Hong Kong money manager with more than 14 years of experience in fixed-income investment, said yuan-denominated bonds will play a key role in the global financial market’s future.

The Chinese bond market is currently worth more than 65 trillion yuan ($9.4 trillion) and is expected to reach 100 trillion yuan by 2020, surpassing the Japanese bond market, according to data information provider Wind.

China’s bond market is already the world’s third-largest, behind Japan and the United States.

Contact reporter Liu Xiao (liuxiao@caixin.com)