QDII's investment remit expanded

Offshore capital markets opened up to qualified domestic institutional investors

China has expanded the investment scope of qualified domestic institutional investors (QDIIs) to allow them to invest in offshore capital markets, in particular equity markets. This permits domestic Chinese investors to take on higher risk and potentially achieve higher yields from their foreign investments.

The rules previously restricted QDIIs, chiefly China's major commercial banks, insurance companies and one fund management company, to investing in mainly fixed income and currency products. Only a small portion of the total quota for overseas investment under the QDII scheme had been taken up six months after the programme was launched. This was largely due to the higher yields possible from equity investments in China's domestic stock markets and the fears of losses on exchange of the foreign currency back into Chinese renminbi.

Under the new rules, effective July 1, 2007, the QDIIs will be able to invest in around 20-30 jurisdictions' capital markets, giving the Chinese QDIIs more flexibility. The chief beneficiary is likely to be the Hong Kong stock market.

"Hong Kong is well positioned to capitalise on the QDII scheme, with a large product range, including 2,000 SFC-authorised fund products, that gives access to pretty much any international market," Martin Wheatley, chief executive of Hong Kong's Securities and Futures Commission tells Asia Risk. "QDII is a big change but a big win for Hong Kong."

Theoretically, there will be no quota limits.

The establishment of the QDII programme and its sister scheme, the qualified foreign institutional investor (QFII) programme arose out of agreements China made prior to its joining the World Trade Organization in January 2002.But the impetus driving this stage of development of the two programmes has had less to do with international investment and market opening efforts, and more to do with checking the rise of the country's fast-growing foreign currency reserves and the appreciation of the currency.

QDIIs need to obtain approval to qualify, but once in the scheme, the domestic firm will not have to apply on a case-by-case basis to make each investment. All the major commercial banks acquired or developed investment products to attract investors to the scheme, which was launched in mid-2006.

The take-up of the initial quota granted to 19 financial institutions was thought to be just 2-3% of the $12.1 billion offered. But the major commercial banks have reported a significant rise in interest in the past four weeks. Industrial and Commercial Bank of China said in early July that it had raised Rmb4.5 billion ($58.8 million) from its first QDII product that gives access to international shares. About half the funds would be invested in red chips (companies with a China-based parent but with significant earnings overseas), H-shares (Hong Kong-listed shares of China's state-owned enterprises) and initial public offerings, the bank said in a statement.

Li Kemu, deputy chairman of the China Insurance Regulatory Commission, said on June 27 that mainland insurance companies would be allowed to invest in overseas stocks through the QDII programme within the next three months.

- Kathleen Kearney.