The QDII scene in China has been at a standstill ever since Schroders' China JV with the Bank of Communications launched its Bocom Schroders Global Selection Fund on August 22 last year. Three weeks later, Lehman Brothers collapsed, AIG was bailed out and Merrill Lynch was forced into a marriage with Bank of America.

Alarmed at the chaos, decision makers at the State Administration of Foreign Exchange (Safe) froze foreign-exchange quota approvals for fund managers, which had hoped to launch products under the qualified domestic institutional investor (QDII) programme.

There are now 20 fund houses in line for such approval. These are the fund houses that have received the blessing of the industry regulator, the China Securities Regulatory Commission, which is the penultimate step before winning Safe's quota.

It is now 10 months since the last QDII fund was given a quota, and the rumour mill about which company will be allowed to return to the market first is at full tilt. The betting in Shanghai is that QDII funds will be approved by September, although some observers reckon the first won't launch until November.

Atop the queue awaiting Safe's approval are Guangzhou's E-fund and Shanghai's China Universal. The two houses have already assembled their in-house investment teams. (E-fund opened its Hong Kong office in January this year. It now operates in IFC.)

E-fund is known to have signed up State Street Global Advisors as its partner to launch an Asian enhanced strategy product, while China Universal is backed by Capital International.

E-fund and China Universal are seen to be the last few players to pursue active global strategies, marking a transition phase from the first generation of QDII. A second generation of QDII is now brewing, as regulators and fund houses exhibit a strong preference for passive, indexed strategies for qualities such as transparency and liquidity.

Other firms also on Safe's waiting list include: Changsheng, China Merchants Fund (JV of ING), Lord Abbett, UBS SDIC, Fullgoal (JV of Bank of Montreal), Da Cheng, Bosera, Guotai, Penghua (JV of Eurizon), Invesco Great Wall, AIG Huatai, Everbright Pramerica, Citic Prudential, Franklin Templeton Sealand, Guangfa, BoC International (JV of BlackRock), and ABN Amro Teda (now a JV of BNP Paribas).

Among these Guotai is going to partner with Nasdaq OMX to develop a passive offering indexed to the Nasdaq 100. It is reportedly preparing a fixed income QDII fund, and has mandated Calyon as its advisor - a coup for Calyon, which sources say snatched the deal from BNP Paribas Investment Partners. In other news, Changsheng is said to have already mandated Goldman Sachs as an advisor. Meanwhile, the JVs will most likely develop products with their foreign shareholders.

Industry execs suggest Safe will be more comfortable giving out a new quota when the existing QDII funds recoup their losses and at least see their NAVs return to launch levels. After all, officials are still facing ongoing criticism for opening the floodgate for the first generation of QDII. (On top of which sits CIC's losses in foreign investments, to which the Safe is responsible for funding.) The agency is desperately trying to time the next batch of QDIIs well in order to avoid similar embarrassment.  

Only two out of nine existing QDII funds are in positive territory -- Fortis Haitong China Overseas Best Selection Fund and Bocom Schroders Global Selection Fund. As at the end of June, the two were up by 50.09% and 33.80% respectively since launch. The seven other existing products delivered a -29.6% loss on average. These range from China International's -49.6%, Harvest's -41.4%, China Southern's -36.2% to ChinaAMC's - 30.9%, ICBC Credit Suisse's -26.4%, Yinhua's -17.8% and Fortune SGAM's -5.0%.