The Hong Kong stock market rally and the launch of cross-border stock connect programmes with the Mainland have spurred Chinese asset managers to reactivate their Qualified Domestic Institutional Investor (QDII) products.
The QDII programme, which dates to 2006, allows Chinese financial institutions to invest in foreign fixed income and equities.
China’s State Administrative of Foreign Exchange (SAFE), the administrative agency which controls the country’s foreign reserves, has granted quotas totalling US$89.9 billion to 132 Mainland financial institutions.
But the QDII market was hard hit when SAFE ceased granting new quotas in March 2015, in a move to stabilise the RMB exchange rate in the wake of heavy capital outflows.
The ensuing quota drought resulted in a number of QDII funds, many of which were focused on the Hong Kong and US markets, being suspended from subscription and redemption.
“The QDII market was brought down by the QDII quota suspension, but it has shown signs of recovery this year with the growing market demand driven by the uptick of Hong Kong, US, and Europe markets. We’ve seen many QDII products (have) outperformed the market,” a senior analyst from Shanghai Securities tells Asia Asset Management (AAM), speaking on condition of anonymity.
The resurgence has prompted some fund managers, including Bank of China Investment Management (BCIM) and Harvest Fund Management (HFM), to restore trading of their suspended QDII funds in recent months. BCIM and HFM say this is to “accommodate the growing demand from investors”.
“It’s reasonable for fund managers to reactivate their QDII products to quench the market demand,” the Shanghai Securities analyst says.
“Despite the dearth of QDII quota, QDII funds can use stock connects to bridge the gap. For example, about 95% of Hong Kong equities invested by our QDII products are through the cross-border programmes,” Yiqian Jiang, head of China equities and portfolio manager at Harvest Global Investments, the international arm of HFM, tells AAM.
The Shanghai-Hong Kong Stock Connect programme, launched in April 2014 allows Hong Kong investors to trade Shanghai-listed equities, and Mainland investor to invest in Hong Kong shares.
The programme was expanded to Shenzhen-traded equities with the launch of the Shenzhen-Hong Kong Stock Connect last December.
Some large asset managers, such as China Asset Management Co. (China AMC), are able to further draw down from their existing QDII quotas to meet market demand.
“As China AMC is one of the largest asset managers in China, the QDII quota we received from the SAFE is relatively large compared to our peers. As such, we still have sufficient quotas to support our QDII funds,” a China AMC spokeswoman tells AAM.
Figures from SAFE show that China AMC received a quota of US$3.5 billion, the largest among Mainland fund houses.
From an investment perspective, the fact that the Hong Kong stock market has gained about 50% since early 2016 will not undermine the attractiveness of QDII products, according to Ms. Jiang.
“From a valuation standpoint, H shares still look appealing to Mainland investors as many A-share equities still have significant premiums over their H-share counterparts,” she says.
