Market Views: What could the QDII scheme’s expansion offer China investors?

With a quota increase of up to $10 billion for China's outbound QDII scheme in the offing, in which asset areas could mainland investors see value?
Market Views: What could the QDII scheme’s expansion offer China investors?

The Chinese foreign exchange regulator's decision to ease outbound investment limits further and to allow domestic institutional investors to move more funds offshore means that the country could see its onshore asset owners rush to invest

A senior official from the State Administration of Foreign Exchange (SAFE) said last week at a conference that fresh quotas worth up to $10 billion will be issued in several batches under the outbound Qualified Domestic Institutional Investor (QDII) scheme, according to a Caixin Global report on October 22. At the same time, China will also expand the Qualified Domestic Limited Partner (QDLP) and Qualified Domestic Investment Enterprise (QDIE) roles of the scheme which are being piloted in Beijing, Shanghai and Shenzhen. 

When the regulator last raised the QDII's quota in September, an additional $3.4 billion was introduced to support the central government’s economic policy of “Dual Circulation”.

As of October 31, SAFE allowed 157 financial institutions to invest a total of $107.3 billion via the QDII scheme. These investors include fund managers, securities firms and wealth management subsidiaries, according to SAFE's announcement.

Date Total quota ($ billion) Change ($ billion)
April 2018 98.333 +8.34
May 2018 101.503 +3.17
June 2018 103.333 +1.83
July 2018 103.233 -0.1
April 2019 103.983 +0.75
September 2020 107.343 +3.36

Source: State Administration of Foreign Exchange 

Liu Shichen, head of research at Shanghai-based Z-Ben Advisors, believes that institutional investors such as insurers would probably favour international developing and developed market index funds or exchange-traded funds (ETFs) to capture market beta. "Investors will focus on offshore-listed Chinese companies, US dollar-denominated bonds from Chinese companies and also stocks from developed markets with which they are more familiar such as the US and Hong Kong," Liu added.

China wants to expand access to such instruments. Regulators in Hong Kong and mainland China have recently authorised the first batch of ETFs to be cross-listed and tradable on each other’s market. This is an expansion of the existing Stock Connect scheme launched in November 2014. And in May last year, the China Securities Regulatory Commission announced the launch of a cross border investment scheme linking China and Japan’s markets through ETFs. 

Such connections encourage the expansion of the QDII quota. AsianInvestor asked several experts which geographies or asset classes will benefit most from any easing.

The following contributions have been edited for clarity and brevity.

Melody Yang, partner
Simmons & Simmons

Melody Yang

We believe that China concepts stocks (stocks listed offshore by companies with primarily mainland businesses), including those listed in Hong Kong and the US, are likely to be one of the popular areas in which QDII would look to invest.

We have seen a strong recovery and a rapid rebound in the Chinese economy. Therefore, companies that have significant assets or operations in mainland China would benefit from the trend. Although there might still be some disparities in those cross-listed companies, we believe that the correlation of price movements would be high.

Increasing the quota would also allow QDII to invest substantially in Southbound Trading under the Stock Connect, between Shanghai/ Shenzhen and Hong Kong. In our understanding, investing into Hong Kong stocks via the QDII [scheme] benefits from flexibility on several levels including the number of trading days. Stock Connect has fewer trading days since it observes public holidays on both the Hong Kong and the mainland sides.

Additionally, developments such as the China-Japan ETF Connect and the Mainland-Hong Kong ETF Connect might lead to QDII increasing ETF allocations as well.

Philip Chiang, vice president, investor services
Brown Brothers Harriman

Philip Chiang

As the local investors on the mainland look for more diversified investment, doing so via a QDII fund is one of their favourite channels to access offshore markets. 

Mainland investors would prefer the markets with which they are familiar, such as Chinese companies listed in Hong Kong and the US. We see that there is great demand from QDII investors for offshore mutual funds. 

Although the retail investor on the mainland cannot currently invest directly into offshore mutual funds, the QDII investor could have exposure to the offshore market indirectly through these kinds of QDII products. Switching among mutual funds within the same fund universe is also very common and cost-efficient for investors.

The newly reported QDII quota allocation is perceived as one of the many signs of an accelerating opening up of China's capital markets. Chinese managers will be more motivated to grow their overseas investments to a broader space of asset classes like ETFs, alternatives and with ESG also gaining more attention from these managers as well.

Michael Wu, country executive for Greater China
Northern Trust

Michael Wu

With the launch of the China-Japan ETF Connect last year, and the recent introduction of the China-Hong Kong ETF Connect, it is expected that some of the new QDII quota will be set aside to support and promote similar initiatives with other markets.

This is a strategic initiative on China’s part to connect multiple international markets to its own capital markets.

Against the backdrop of a global economic slowdown and a long period of lower interest rates, investors seeking a risk-managed approach to growth and yield could consider allocation to high income strategies such as high dividend global equities and global high yield bonds.

We have also seen ESG-related discussions gaining greater traction in China. Investors are increasingly incorporating ESG principles to improve returns and achieve diversification benefits.

Desiree Wang, head of China
JP Morgan Asset Management

Desiree Wang

Various recently announced liberalisation measures including the QDII quota expansion help pave the way for Chinese investors to achieve more diversified and balanced portfolios.

We continue to see rising appetite from Chinese investors, both individual and institutional, in increasing their international diversification in global markets.

Although offshore assets are relatively less appealing at the moment given that China is leading the global economic recovery from the pandemic disruptions, we still see decent investor demand in diversification by investing into global high yield bond and multi-asset solution products.

Alternative strategies investing in overseas private equity, private credits, real estate, infrastructure and transportation are also increasingly gaining traction among Chinese institutional investors and high-net-worth individuals.

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