SHANGHAI/SINGAPORE China's mutual fund industry is pushing to develop investment products linked to local commodity futures, betting that plans to fight chronic oversupply in the country's mammoth resource sector will drive up prices for raw materials.
The funds want to branch out beyond their traditional focus on stocks and fixed-income, with no immediate upturn in sight in the wake of turmoil last year that pulled down share markets by nearly 50 percent and forced bond yields to multi-year lows.
But a government campaign to streamline China's bloated mining industries and crimp supply that has dragged on global commodity markets has buoyed hopes of an enduring recovery in prices of materials such as iron ore and copper, burnishing their appeal to fund managers.
Inflows from China's mutual fund industry, estimated to have managed 8.4 trillion yuan ($1.3 trillion) by the end of last year, could be a major boost to liquidity in one of the world's largest commodity futures markets, which had transaction values totalling 136.5 trillion yuan in 2015.
That would ramp up the pricing power of the top consumer of most raw materials at a time when Beijing is looking to increase its sway in international markets.
"Investors have a growing appetite to diversify their investment destination after the stock market crash, and believe commodities are good assets as China is pushing for capacity-cut reform that will be favourable for raw materials," said Fang Shisheng, a senior official with Orient Futures in Shanghai.
Shenzhen-based UBS-SDIC Fund Management in August 2015 launched the first Chinese mutual fund product to invest in local commodities, linked to silver futures on the Shanghai Futures Exchange.
Other funds are now waiting for regulatory approval for similar steps. They include Fortune SG Fund Management, which a company official said was planning a fund that tracks Shanghai copper futures, and Huatai-Pine Bridge Investments, which wants to start a fund to track an index of several agricultural futures.
Huang Lei, a marketing manager at Beijing-based Harvest Fund, told Reuters the company is also weighing the launch of a commodity product, though nothing has been set in stone.
Meanwhile, a manager with Wanjia Asset said the Shanghai-based firm was preparing application materials to begin a fund that tracks a commodities futures price index, without giving more detail.
"Commodities futures markets have been very hot these days while there are very few opportunities in other markets, so mutual funds are looking into commodities," she said.
Several commodity markets around the world have recovered this year, with Dalian iron ore futures rallying more than 35 percent since early January and oil futures climbing back near $40 a barrel after plunging below $30.
For the first two months of this year, total ShFE trading volumes surged about 50 percent, with volumes on the Dalian Commodity Exchange shooting up over 85 percent.
But some futures brokers warned that Chinese mutual funds would need time to understand commodity futures and to hire experienced traders.
"The trading of commodities futures is different, requiring strong risk control skills ... but it's becoming a trend for mutual funds to participate in the arena too," said a futures broker who speaks to funds.
Others saw such diversification as inevitable.
"Taking the longer view, I ... see the development of new commodity investment funds as the continued and necessary diversification of investment products in China - a process that will continue for many more years," said John Browning, managing director of Hong Kong-based Bands Financial.
($1 = 6.5094 Chinese yuan renminbi)
(Reporting by Ruby Lian and Gavin Maguire; Additional reporting by Shanghai Newsroom; Editing by Joseph Radford)
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