The China Banking Regulatory Commission has signed a memorandum with Japan's Financial Services Agency, signalling an expansion of the country's qualified domestic institutional investor (QDII) programme. Japan joins Hong Kong, the UK and Singapore as approved investment markets for Chinese banks.

Under the existing templates with UK and Hong Kong authorities, banks will be allowed to launch funds with allocations to listed equities, fixed income, or registered funds. However, the scheme does not permit investments in hedge funds and other alternative investments at this stage.

The Nikkei 225 index jumped nearly 600 points on the announcement, closing at 13,914 points yesterday (the memorandum was signed last Friday, February 22). Japanese investors are also pouring into the market on rumours that China's sovereign wealth fund, the $200 billion China Investment Corporation (CIC), is planning to acquire a stake in the Tokyo-listed oil & gas developer Inpex Holdings.

CIC's spokesman in Beijing says he is "unaware" of the acquisition at this stage.

China's bank QDII programme is targeted at high-net-worth customers that want to invest in overseas funds. Investments start from Rmb100,000 ($14,019) or Rmb250,000 ($35,048) per tranche.

A bank's investment plan is required to be approved by regulators under existing CSRC rules prior to the launch of a fund. It is a process that can take up to three months, and longer in bullish periods when the regulator puts the brakes on fund launches in order to prevent the market from overheating.

A survey of leading QDII managers by HSBC's equity strategist Steven Sun ranks Japan as the least preferred investment destination out of all of Asia. Sun cites historical sensitivity as the chief reason for the lack of interest.

Meanwhile, Z-Ben Advisors, a Shanghai-based research agency, notes QDII funds are expected to face a challenging year in 2008 because investor confidence has been damaged by earlier QDII launches. He says there was a significant mismatch between investment performance and expectations from mainland investors in the second half of 2007.