Aberdeen to launch China-A share fund on Monday

Singapore

ABERDEEN Asset Management is launching a China-A share fund on Monday to capitalise on the long-term growth potential of mainland China. The new fund, domiciled in Luxembourg, will make use of Aberdeen's 600 million renminbi (S$133 million) RQFII (renminbi qualified foreign institutional investor) facility that was granted to the group's Asian arm late last year.

The Fund will be marketed to investors in Singapore and Hong Kong with a minimum investment of US$200,000. Other share classes will be on offer for European-based investors with a higher minimum US$1 million initial investment.

This came amid a flurry of funds set up to track the Chinese stock market that staged a strong rally last year and is expected to benefit from the deepening of reforms in China's financial system.

Aberdeen said its China-A share fund will be managed by their Asian equities team based in Hong Kong and Singapore, which has been investing in China since the 1980s.

It also stressed that the investment team will follow "rigorous investment process" with careful company due diligence. The Fund will invest in only 25-30 companies with compelling long-term prospects - out of over 2,000 companies listed in Shanghai and Shenzhen.

From the start, the new Fund will have a bias to consumer, healthcare and travel companies - all areas where state-owned enterprises are less dominant - as the private sector is expected to be a greater growth driver and as Beijing seeks to stimulate more household spending.

Nicholas Yeo, head of Chinese equities at Aberdeen Asset Management, said that China is going through a complex adjustment and is very much an emerging market that demands discipline and patience.

Though the country is seen treading the right path towards quality growth, there will be "legacy issues for years to come in the shape of bad debt, corporate malfeasance and even outright fraud", he said. "So with this fund, we are not saying now is the right time to buy the market, but asking investors to consider China as a long-term proposition."

A-shares enjoyed a strong rally last year, with the CSI 300 index that tracks 300 A-Share stocks listed on the Shanghai and Shenzhen stock exchanges surging 51.7 per cent. Several fund products have been set up to track China's domestically listed stocks.

Foreign investors can currently participate in the China's domestic stock market through the Qualified Foreign Institutional Investor (QFII) funds, RQFII funds and RQFII A-share exchange traded funds (ETFs). Retail investors in Hong Kong can also trade China's A-share market through the Shanghai-Hong Kong Stock Connect programme.

But the A-share market is notoriously speculative, with recent buying led by margin traders betting on interest rate cuts. Meanwhile, China's economy is battling weakening investment growth and deflationary pressures.

"For Aberdeen, these trends are positive as they should, over time, lead to more market-based pricing, competition and investor transparency," Aberdeen said. But it conceded that the lack of transparency is a widespread problem in China, which is why the forensic skills of Aberdeen's in-house governance experts is vital for the new Fund.

For its existing China portfolios comprising mainly H-shares of Chinese mainland companies and Hong Kong-listed firms, Aberdeen has long shunned mainland Internet companies that list overseas because of the lack of legal protection for shareholders under their variable interest entity (VIE) structures. These are structures used by Chinese firms to get around the country's strict rules on foreign ownership.