In the space of a day, three of the leading Chinese fund management companies — China Southern Fund Management Co, China Asset Management Company and Harvest Fund Management Co — each raised $4bn (£1.94bn) from domestic investors, to form funds mandated for overseas investments through China’s qualified domestic institutional investors (QDII) regime.
The QDII system, which exists alongside the familiar Qualified Foreign Institutional Investor (QFII) regime, permits inbound investments by foreigners to purchase domestic A-shares and other Renminbi-denominated shares. In contrast to the QFII scheme, the QDII permits Chinese investors to make overseas investments through designated financial institutions such as banks, trust companies, insurance companies and asset management companies.
The QDII is one of a series of reforms through which the Chinese regulators have sought to address the surge the country’s massive foreign currency reserves, currently amounting to $1.33trn (£645bn), and its enormous trade surplus by liberalising the presently restrictive regulations governing overseas investments. To a certain extent, it is the massive build-up of capital within
However, the introduction of the initial wave of QDII investment products (which were originally limited to investments in fixed-income instruments) in early 2006 received a relatively lukewarm response from Chinese investors. In view of the spectacular returns yielded by the soaring domestic equities market, the lack of enthusiasm for the relatively conservative first-generation QDII investment products was not surprising.
In mid-2007, the Chinese regulators sought to address the perceived shortcomings of the initial wave of QDII products through a number of legislative initiatives. The China Banking Regulatory Commission (CBRC) liberalised the scope of investments permitted by banking QDII products to allow investments in equities (albeit limited to Hong Kong Stock Exchange at the moment), while the China Securities and Regulatory Commission (CSRC) promulgated the provisional guidelines governing QDII funds for overseas investments in a relatively broader range of investments, including foreign equities.
The dramatic impact of these reforms is shown by the enormous demand from domestic investors for the first QDII investment fund managed by China Southern Fund Management Co.
Other Chinese fund management companies such as China International Asset Management (the JP Morgan joint venture) and Haitong Fortis, buoyed by the immense success of China Southern Fund Management Co, have also made applications to the CSRC to launch their own QDII funds. In response to the announcement of such funds, major Asian indices, particularly the Hang Seng Index, have risen to gravity-defying highs, probably in part due to the anticipation of massive outflows of liquidity.
From a broader perspective, the QDII regime is merely one facet of
This potentially marks the next phase of development of
Similarly, while the Chinese fund management industry has achieved spectacular growth in the domestic markets in recent years, there are still relatively fewer Chinese fund managers who have fund management skills to a global standard or the expertise to handle international investments.
Despite the initial successes in raising such large sums for outbound investment, the real challenge is the proper management of such pools of funds in order to achieve sufficiently attractive investment yields, relative to investments in the Chinese markets. At the same time, the Chinese regulators were understandably cautious in setting various investment guidelines and limitations in order to ensure prudent investment management to regulate the domestic players’ first foray into international management.
Hence, the jury is still out on whether the newly-enacted QDII regulations could achieve prudential financial governance without unduly hindering these funds in achieving the requisite levels of return.
As the next phase of liberalisation and development of
As opposed to taking a laissez-faire approach to allow a more ambitious and wide-scale implementation of the QDII regime, the Chinese Government has adopted a gradualist and incremental approach.
The total quota permitted for QDII investments is relatively small compared to the total amount of foreign reserves held and only designated institutions of sufficient standing are permitted to partake in such outbound investments. Indeed, it would be exciting to see how this regime takes shape in the coming years, as
Angus Duncan is a partner and Yong Kai Wong an associate at Cadwalader Wickersham and Taft.
