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China's recent reform to usher foreign capital into its stock bourses through the Qualified Foreign Institutional Investor (QFII) scheme is expected to fuel a boom in the lucrative custodian businesses of commercial banks.
Domestic commercial banks see it as a golden opportunity to expand profits from custodian operations, a key part of intermediary businesses they increasingly rely on, in an era of sagging lending incomes.
"We expect the investments by QFIIs to be around US$50 billion," said Zhou Yueqiu, general manager of the Industrial and Commercial Bank of China's (ICBC) fund custodian department. "That means 1 billion yuan (US$120 million) in custodian fees (annually)."
That figure is irresistibly tempting to Chinese commercial banks. A little more than four years after the fund custodian business started in China, some 100 billion yuan (US$12 billion) worth of securities funds now under custody generate just 200 million yuan (US$24 million) annually in custodian incomes.
"But the market is just huge in the future, and everybody is looking at it from a strategic point of view," Zhou said.
The battle over the first batch of QFII custodian licences is already escalating. Since the government announced the landmark move early last month to allow foreign investors to, through QFIIs, trade its US$500 billion A shares and bonds previously reserved for Chinese, eight banks, including five Chinese and three foreign ones, have reportedly submitted applications for custodianship.
Zhou, whose bank was among the earliest applicants, said he believes the announcement of the first licences just days away, but declined to predict how many would be granted.
"Optimistically speaking, it is likely to be before the end of the year, so that the market reaction will be better," he said without elaborating.
The first batch of QFII approvals is expected to follow as applicants are required to appoint one custodian bank in their application documents. An unknown number of foreign institutional investors have applied.
Custodian banks will be responsible for the settlement needs of QFIIs, overseeing their operations and reporting regularly to China's financial authorities.
Zhou told China Daily he was optimistic that his bank would be among the first QFII custodian banks: "Fairly confidently, I can say we should be one of them, because we are the best."
The ICBC, China's largest commercial bank, has already tailored a QFII-enabled technical system and expects to complete trial operations by the end of the year, Zhou added.
(China Daily December 27, 2002)
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