Market participants urged to enhance risk management, speed up innovations The mainland's qualified domestic institutional investor (QDII) scheme, which allows the country's banks and mutual funds to pool clients' holdings for investments in offshore securities, should continue to expand in the near future, the chairman of China's banking regulator said yesterday. 'My thinking is the more the better in the near future so long as the banks are qualified,' China Banking Regulatory Commission chairman Liu Mingkang said. Banks must be able to manage the resultant risk and ensure adequate transparency and information disclosure to clients, he said. Mr Liu expressed concern about banks' limited ability to hedge against currency exposure in the new business and manage counterparty risk. Their lack of capability in pricing overseas investment products was also an issue. The government, facing a rapid build-up of foreign reserves and strong foreign direct investments, earlier this year sought to reduce domestic excess liquidity and pressure for further yuan appreciation by allowing its banks and mutual funds to pool funds from clients for investment in offshore securities. Since then, US$10.8 billion of QDII investment quotas have been awarded to eight domestic and foreign banks as well as a mainland fund manager. The ability of banks in the QDII scheme to hedge against exchange risk suffers from the absence of hedging instruments such as non-deliverable currency forwards and options on the mainland. Mr Liu called on the Ministry of Finance, the People's Bank of China and market participants to speed up innovations, although he admitted the lack of an effective domestic yield curve hinders the introduction of such hedging instruments. He also urged mainland and Hong Kong regulators to enhance communications to better monitor and share information on capital flow, product design and sales, counterparty risk and investment instruments. Commenting on a drive by mainland banks to diversify into other financial services such as insurance, Mr Liu said they must be held responsible for depositors in considering such a move. 'You must be risk-averse and risk-neutral,' he said.