The State Council has given the National Council Social Security Fund the go-ahead to invest in the overseas capital market, and an offshore investment banking subsidiary of the Bank of China may take the lead role in the fund's asset management outside the mainland.

The State Council has given the National Council Social Security Fund (NCSSF) the go-ahead to invest in the overseas capital market. As a result, China's long-awaited qualified domestic institutional investor (QDII) scheme should be introduced soon.

The NCSSF is the first domestic institution to get the green light to invest in the overseas capital market.

Industry sources say the State Council recently approved the proposal by the Ministry of Finance to let the social security fund invest overseas, with Hong Kong as the preferred target market.

Bank of China International Holdings Ltd., the overseas investment banking subsidiary of the Bank of China, may take the lead role in the fund's offshore asset management, sources revealed.

The social security fund controlled about 124 billion yuan (US$15 billion) of assets at the end of 2002. It is estimated that only about 5 billion yuan (US$603.8 million) will be allowed to be initially invested in Hong Kong.

An official involved with the fund said the council has been conducting a number of studies in the lead up to the move overseas, but he was not able to say when all of the frameworks would be in place.

Even with State Council approval, many preparations still have to be made to implement the plan, including the drafting of detailed rules and a decision on a fund manager and custodian.

The council is already investing in securities on the domestic bourses through mainland fund managers.

It will take some time for the QDII investment to start formally, as the authorities have yet to set the market threshold and come up with parallel rules to allow such outbound capital investment when the Renminbi is not fully convertible under the capital account, said Tang Di, an analyst at CITIC Securities Co.

When China approved the qualified foreign institutional investor (QFII) system last year, allowing foreign investment into the domestic A share and bond markets, it took eight months for UBS, the first licensed QFII, to get through all of the paperwork and make its first investment order.

Tang said an institution like the social security fund should follow a prudent investment methodology to minimize risks.

The process of choosing the appropriate fund manager is one of the most crucial issues. Though some domestic fund managers have expressed interest, overseas institutions have their own advantages, Tang said.

Other domestic institutions, including insurers, securities houses and fund managers, are also looking forward to entering the overseas capital market.

(China Daily March 5, 2004)