In the QDII (qualified domestic institutional investor) classroom at the China Alternatives Summit, the atmosphere was sombre. It was only in 2006 that QDII products were initiated in China, and therefore compared to QFII which is already out of the kindergarten, QDII is still in its 'terrible-twos' phase.

ôThe reaction from investors originally was to question why they would want to invest overseas,ö says Astrid Gehnel-Ceelen, head of QDII at Fortis Investments. ôBecause they saw a local share market that was thriving, denominated in a currency that was strengthening.ö

Of course their concerns turned out to be true. The currency has continued to get stronger and overseas markets have swooned. (So has ChinaÆs of course, but those same investors might conveniently overlook that.)

QDII structurers are marketing into a primitive demographic, investor-wise, and one panellist pointed out that the grasp of investment basics can be unsophisticated. For example, investors are not aware of differentiated notional values, and think that a product that trades below RMB1 ($0.14) is cheaper and better valued than a completely different one from another company that trades at, say, RMB5 ($0.71). Consequently, QDII product offerors will often split the value of their product when it reaches a certain level, so that investors will be encouraged by what ostensibly appears to be a cheap and good value product.

ôThe product is not in a good position,ö says Sheldon Gao of Schroders. ôPeople have the licenses in place, but right now they are in no hurry to issue products.ö

Chinese domestic banks and international banks based in China account for $16 billion of the $45 billion scheme. The remainder is allocated to securities companies, fund managers, insurance companies and trust companies. ôTrust companies can already sell local hedge funds to Chinese investors,ö adds Sheldon Gao. ôSo in that respect they are the most flexible of the scheme participants.ö

At present 30%-40% of products focus on Hong Kong and Gehnel-Ceelen expects more evolution in the product classes, towards more guaranteed products and more hedge funds. Will that be a solution though? Hedge funds are investments for sophisticated investors. Allowing Chinese investors to make a quantum leap into, say, international multi-strategy funds when they are still learning about basic equity and fixed income capital markets looks indelicate.

QDII has moved on from its original remit of fixed income products and now embraces equity and mutual fund products. Approved countries currently number Hong Kong, Singapore, UK, Japan, Luxembourg and the US. More are expected to follow.