QDII funds get go-ahead to invest in Britain

PUBLISHED : Tuesday, 18 December, 2007, 12:00am
UPDATED : Tuesday, 18 December, 2007, 12:00am

The China Banking Regulatory Commission signed an agreement with its British counterpart yesterday giving firms in the qualified domestic institutional investor scheme access to the first foreign market outside the country proper.

Britain will become the second overseas market after Hong Kong for selected mainland banks, fund managers and brokerages to buy securities. Beijing is speeding up QDII funds' access to overseas markets, allowing them to build up exposure in additional markets.

Sun Lujun, a deputy head of the State Administration of Foreign Exchange's current account department, said the government would broaden the range of investment destinations, helping institutions to diversify risks and shore up profits.

Beijing, under pressure to reduce a build-up of cash in the mainland economy, is introducing more channels for capital outflows.

The regulator's remarks are in line with last week's strategic economic dialogue between the mainland and the United States, which confirmed that mainland banks would soon be able to invest directly in United States-listed securities.

'In light of higher volatility in global markets, the authorities are eager to see QDII products diversify into a variety of asset classes,' said Jing Ulrich, JP Morgan's chairman for China equities.

When Beijing launched the QDII scheme last year, only banks were allowed to bet on overseas equities. However, in July this year, regulators allowed fund managers and brokerages to sell their own QDII funds.

At the end of October, 16 banks and five fund managers had invested US$28.6 billion worth of funds in overseas securities. Mainland investors have been particularly keen to tap Hong Kong-traded stocks, which are trading at a huge discount to their mainland A-share counterparts.

China International Capital Corp, in which Morgan Stanley has a 34 per cent stake, said yesterday it had received a US$5 billion quota for its QDII fund, spearheading the move among mainland brokerages to trade overseas equities.

'China is bent on using the QDII scheme to balance its international payments,' said Zhou Liang, Lipper's China research head. 'Mounting interest in overseas stocks is also prompting regulatory approvals for more funds.'

Mrs Ulrich expects US$90 billion in QDII funds to leave the mainland next year, of which nearly US$30 billion will be invested in Hong Kong.

The delay of the so-called 'through-train' programme, under which mainland residents would be allowed to invest directly in Hong Kong stocks, would further fuel the growth of QDII products, analysts said.

However, the recent downturn in the Hong Kong market took its toll on the first batch of QDII products run by mainland fund managers. The funds' per-share net asset value all fell below one yuan as of early this month, translating into a paper loss for subscribers.