China's Plan to Spread Tech Wealth Fizzles With Delay of CDR

(Bloomberg) -- China’s ambition to have its citizens profit from the nation’s publicly traded high-tech stars has been dealt another blow.

The six three-year mutual funds set up to invest in the China depositary receipts of such companies have shifted focus to low-yielding bonds instead, generating returns of as little as 0.3 percent since their inception, data compiled by Bloomberg show. That’s a double disappointment after the funds, established in early July and sold to institutional and retail investors, only raised about one third of their upper 300 billion yuan ($44 billion) limit.

Part of the problem is a lack of appropriate investment options. A program to allow China’s overseas-listed technology firms to also trade on exchanges in Shanghai and Shenzhen through so-called China depositary receipts, or CDRs, was iced after mainland stocks tanked. Smartphone maker Xiaomi Corp. forged ahead with a purely Hong Kong share debut while other large companies including Alibaba Group Holding Ltd. and Inc. also put their CDR issuance plans on hold.

“These CDR funds have basically become bond-focused funds,” said Xu Chenghao, deputy general manager in the asset management department of Guolian Securities Co.“It’s difficult to say whether there will be any CDR offerings during their three-year closed period.”

Locked Up

Once invested, people can’t withdraw their money from the funds until the three-year lock-up period ends. Although their purpose was to buy the CDRs sold by large companies listing on the mainland, the funds are now mainly dealing in short-term bonds and other money-market instruments, China Merchants Securities Co. analyst Zhang Xia said. Because they’re mutual funds, they’re likely to stick to high-rated, low-yielding notes that fit their limited risk profile, other analysts said.

The prospect of authorities reviving China’s CDR program looks bleak after the securities didn’t feature in a statement released earlier this month outlining the government’s plan to open up the nation’s capital markets. In addition, no companies have utilized strategic allocations, or the placement of cornerstone shares to institutional investors, since Terry Gou’s Foxconn Industrial Internet Co. raised 27 billion yuan in June.

With CDRs off the table, the mutual funds don’t have a lot of choice but to look for alternatives. However domestic bond returns, while better than last year, are relatively lackluster. The ICE BofAML China onshore bond index has returned 3.7 percent year-to-date versus 10.6 percent in 2015 and 11.8 percent in 2014. China meanwhile is the world’s worst-performing major equity market this year.

New Hires

“CDR offerings are unlikely to be launched this year unless the stock market rebounds,” said Zhang.

In another sign the six funds are moving away from their original mandate, four of them have added portfolio managers who used to be bond traders. China Asset Management Co. this month appointed a new manager for its CDR fund who previously has looked after as many as 11 bond-focused vehicles. China Southern Asset Management Co. assigned a senior executive from its fixed-income investment department to its CDR portfolio.

One upside is that investors have at least been shielded from the recent stock market turmoil.

“The unicorn companies that started trading in Hong Kong this year didn’t perform very well,” said Wang Yifeng, a researcher with China Minsheng Banking Corp. If CDRs come to market at a later time, “investors’ interests may be better protected.”

Xiaomi has had a roller-coaster ride since listing in July. Its debut was disappointing and a post-earnings rally proved short-lived as investors question whether the Beijing-based group deserves to be valued like a high-growth internet company. Xiaomi was little changed at HK$17.14 as of 4:31 p.m. on Thursday, about 0.8% higher than its initial public offering price of HK$17.

The six funds are managed by China Southern Asset Management, China Asset Management, E-fund Management Co., Harvest Fund Management Co., China Universal Asset Management Co. and China Merchants Fund Management Co.

“Without changing the scope of investment, the funds might continue to focus on capital protection,” making it tough to deliver outsized returns, Wang said.

©2018 Bloomberg L.P.