Domestic observers say that plans to expand quotas for China’s Qualified Domestic Institutional Investors (QDII) are part of broader efforts to accelerate Chinese investment abroad.
In April the State Administration of Foreign Exchange (SAFE) announced that it would accelerate expansions of QDII quotas, after keeping the QDII quota at around USD$90 billion since March 2015.
The long-stationary cap has meant that many fund companies in China that possess QDII status have lacked investment quotas of their, and been unable to provide QDII fund products.
QDII’s are domestic Chinese financial institutions such as fund management companies or securities companies that have obtained approval from the authorities to invest in securities on overseas capital markets.
They were first launched over a decade ago in April 2006, when the People’s Bank of China led the issuance of the “Provisional Measures on the Administration of Commercial Banks Undertaking Offshore Wealth Management Operations on Behalf of Clients” (商业银行开展代客境外理财业务管理暂行办法).
In June 2006 Hua’an Fund became the first funds company to obtain QDII status, and in September of the same year it issued the first QDII fund product in China.
The QDII system saw more rapid development following the issuance of the “Provisional Measures on the Administration of Overseas Securities Investments by Qualified Domestic Institutional Investors” (合格境内机构投资者境外证券投资管理试行办法) in June 2007 by the China Securities Regulatory Commission (CSRC), which set out detailed regulations on market entry requirements, examination and approval procedures, asset entrustment and other areas.
During their initial period of development QDII funds mainly targeted Hong Kong equities. Prior to 2013, over 60% of QDII fund investments were allocated to the Hong Kong market.
Under the current QDII investment framework the State Council sets a total QDII quota, while the China Banking and Insurance Regulatory Commission (CBIRC) and CSRC examine and approve the qualifications of domestic institutions, as well as stipulated overseas investment scopes.
SAFE then examines and approves the investment quotas for QDII’s, as wells conducts supervision and inspection of cross-border remittances.
While QDII quotas saw rapid growth from 2007 to 2013, quotas began to slide after 2013, and have remained unchanged since early 2015.
During the three year period from March 2015 to March 2018, no new QDII investment quotas have been approved, although many institutions have successfully obtained QDII status during the period.
As a consequence these new QDII’s have been unable to undertake foreign investment operations despite their status, and for nearly three years there have been few new QDII fund products.
Data from Wind indicates that QDII’s in the securities sector currently account for the largest share of quotas at 44.26%, followed by insurance sector QDII’s, who have obtained approval for 33.40% of quotas.
SAFE’s recent decision to expand the quotas is viewed as part of broader efforts to open up China’s capital markets and accelerate overseas investment, particularly in the wake of the more recent expansion of daily quotas for the trading of Hong Kong shares via the Shanghai and Shenzhen Stock Connect initiatives.
Professor Guo Tianyong from Renmin University said to Xinhua that ongoing improvements to the QDII system will serve to expand global asset allocation channels for China’s domestic investors.
According to Guo improving the overseas investment capabilities will be a key part of opening the Chinese market.
“If quota are comparable to ‘ammunition,’ then overseas investment and researcher capability is the level of marksmanship,” said Guo. “Without good marksmanship, a hunter will find it difficult to obtain fat prey.
“The key issue is to raise the overseas investment capability of China’s asset management institutions.”
Gong Manlin (宫曼琳), ana analyst with Golden Bull Wealth Management Online, said that over the long-term the QDII system will be of benefit to Chinese enterprises obtaining more overseas financing from abroad, and will significantly relieving the expansion pressure on China’s domestic securities market.