China’s recent revival of a programme that allows domestic financial firms to invest in offshore markets is expected to give Mainland investors more options as asset managers develop new funds focused on emerging markets, according to some market experts.
The so-called Qualified Domestic Institutional Investor (QDII) programme, which was launched in 2006, allows Mainland financial companies to invest in foreign stock and bond markets. It was halted in 2015 to stem the Chinese currency’s decline due to capital outflows from stock market volatility sparked by investors using borrowed money to trade.
The programme was revived last month. The State Administration of Foreign Exchange, which supervises China’s foreign reserves, disbursed US$8.34 billion under the scheme to 24 domestic financial institutions on April 24, the agency said in a statement posted on its website the same day.
According to a Shenzhen-based analyst at fund advisory firm Morningstar, most existing QDII products focus on the Hong Kong and US markets, where she says valuations have become expensive.
“We expect asset managers will draw down on the new quotas to develop products focusing on emerging markets,” she tells Asia Asset Management (AAM), speaking on condition of anonymity.
ICBC Credit Suisse Asset Management recently used its QDII quota to launch the first India-focused mutual fund in China and “we’re seeing other managers are looking to apply for similar products”, she says, predicting that the “scope of QDII products will be more diversified”.
However, she notes that the new $8.34 billion quota is relatively small compared to the size of the domestic fund market. “Also, it remains uncertain whether the Chinese government will continue to press ahead with the granting of new quotas,” she says.
China’s mutual fund market had total assets of 12.37 trillion RMB ($1.95 trillion) at the end of March, according to the Asset Management Association of China.
Xav Feng, head of Asia Pacific research at Thomas Reuters Lipper, believes it’s “a bit late” for Beijing to restore the QDII programme because Chinese investors missed the opportunity to take advantage of the US and Hong Kong market rally last year.
“The markets are likely to peak this year, but the investors can still utilise QDII funds to seize the opportunity relating to the A-share inclusion in the MSCI index in June,” Mr. Xav tells AAM.
Meanwhile, China Asset Management Corp (China AMC), which has one of the single largest existing quotas, will keep an eye on overseas investment opportunities and continue to launch QDII funds, a company official tells AAM.
China AMC, which currently has a quota of $3.5 billion, was not given a fresh share last month. The official did not say how much of its quota has been used.
Beijing has awarded quotas totalling $98.3 billion to 144 financial institutions under the programme since 2006.
