General Information

QDII (Qualified Domestic Institutional Investor) scheme, which had been discussed for years in the market, had finally stricken its pose.

In an effort to curb excessive liquidity, the Chinese government has tried to encourage investment in overseas markets since 1996. The Shanghai-based Hua An Fund Management Co., Ltd. became China's first fund management firm to be allowed to invest overseas as a pilot QDII, with a quota of 500 million U.S. dollars.

Its first QDII product, launched in November last year, raised 197 million U.S. dollars and yielded five percent over the subsequent six months.
A fund industry analyst said the launch of the new fund was a landmark step in China's fund industry, meaning that domestic capital can flow over the border to seek better returns.
The China Securities Regulatory Commission (CSRC) allows fund management firms with net assets of more than 200 million yuan (26 million U.S. dollars) and more than two years of operational experience, and securities dealers with net assets of more than 800 million yuan and more than one year of investment management operations experience to apply for QDII status.

The new fund differs from existing QDII funds in that it can invest 100 percent of its assets in global stock markets, instead of investing low-risk, low-return bond and currency markets only. The report said it will operate in the markets of 48 countries and regions, out of which the ten most valuable markets will be carefully selected for key investment.

Currently the 10 markets include the developed markets of the United States, Japan, China's Hong Kong, Switzerland and Italy, as well as emerging markets of Russia, India, Brazil, Malaysia and the Republic of Korea.

In developed markets, the fund aims to gain steady average income in the long term by investing in ETFs, while in emerging markets it will mainly invest in ETFs and mutual funds. In Hong Kong, it will directly invest in stocks.

China currently has $4800bn in household and corporate savings ?C an amount equivalent to about 160 per cent of its gross domestic product. If one assumes a conservative growth rate in savings of 10 per cent per year, we can expect China will have $17,700bn in savings by 2020.

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What is QDII?

1. QDII stands for Qualified Domestic Institutional Investor
2. A plan that allows mainland investors to invest in overseas equities, It is a transitional arrangement that provides limited opportunity for domestic investors to access foreign markets at a stage where a country's currency is not tradable or floating completely freely and where capital is not able to move completely freely into and out of the country.
3. Current quota is at $10.3 billion

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QDII development in China
The China Banking Regulatory Commission, China Insurance Regulatory Commission and China Securities Regulatory Commission oversee relevant QDII operators.

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Three major sources of funds

According to statistics, 5~10 percent of incomes of social security funds, approximately US$2.6 billion, will be invested via QDII. The two insurance companies, Ping An Insurance (Group) Company Of China and China Life Insurance (Group) Company, have invested US$1.75 billion and over US$3 billion in the overseas market via QDII. And statistics from the National Bureau of Statistics of China show that at present, the residents' saving balance has amounted to RMB14 trillion yuan. The great volume of funds left unused had originally posed a quite big problem to banks and financing institutions; however, as QDII got launched, banks can just make use of the large volume of saving balances to make comparatively moderate investments abroad, thus utilizing funds effectively while improving returns from the investments. In addition, as shown by the latest statistics released by the central bank in this April, China's reserves of foreign exchanges has increased to US$871.5 billion during the first quarter of this year, which has also provided huge capital potentials for QDII in future. 

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Who will be the potential beneficiary?

It can be expected from the investment direction of QDII in the future that Hong Kong Exchanges and Clearing Limited (HKEx), the insurance industry, the banking industry, the petroleum industry and the telecommunications industry will be the major beneficiaries. The investment in such industries is preferred. Also, risks of these kinds of investments are much smaller as investments can get fixed incomes from such industries. Therefore, those enterprises enjoying comparatively better return on investment will be the preferred choice for mainland funds.
On the other side, scarcity investment means to invest in such industries developing relatively well abroad (mainly in Hong Kong) but less sufficiently in mainland China as insurance, banking, petroleum, telecommunications, etc.

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QDII Potential Investments

1. Banks
2. Insurance Companies
3. Mutual Fund Managers
4. Stocks
5. Fixed Income

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Gradual influences on the market

Deng Tishun analyzed that QDII will bring forward influences in two aspects when having been started. On a macro level, QDII will expedite China's integration into the global financial market when it has been started while at the same time providing a driving force for China's financial and capital markets to link up with the world as soon as possible. Moreover, the returns from investment were not that high as there existed a kind of blindness in the overseas investment of mainland funds in the past. However, the returns from investment of mainland funds can be raised with reduced risks by investing in those enterprises with a higher credit ranking and better performances or purchasing bonds with a fixed interest rate through QDII.

With an eye on the market, the launching of QDII will not affect the A-stock market greatly. Seeing from another angle, the A-stock market will even be integrated into the global platform instead. On the other hand, the starting of QDII will encourage the pricing of H-stocks and A-stocks to tend to be the same. As for the B-stock market, the establishment of the B-stock market at the beginning is to attract more foreign exchanges to solve the problem of being then lack of foreign exchanges domestically. In face of the status quo that financial competitions are pricking up globally, QDII will interact with QFII and make the B-stock market more opened and more internationalized when having been started.

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