Across The Border

Record number of QDII funds shows Chinese investors’ hunger for offshore stocks

The prospect of the new Shenzhen-Hong Kong stock connect has fuelled a QDII fundraising frenzy

PUBLISHED : Friday, 18 November, 2016, 3:04pm
UPDATED : Friday, 18 November, 2016, 10:35pm

A record number of qualified domestic institutional investor (QDII) funds are in the pipeline, reflecting mainland investors’ increasing enthusiasm for overseas equities ahead of the launch of the Shenzhen-Hong Kong stock connect scheme.

It is estimated that more than 30 QDII products will have hit the mainland market by the end of 2016, enabling investment in offshore stock exchanges. These are likely to raise at least 20 billion yuan of capital from Chinese investors, according to the Securities Times.

The fundraising spree was the result of heightened expectations of an imminent buying euphoria for Chinese companies listed abroad (H shares), particularly Hong Kong, and mounting worries about a weaker yuan.

“QDII funds showed signs of attracting mainland investors because it’s an efficient tool to help them hedge against currency volatility,” said Steven Jia, president of Daokun Asset Management. “It’s time for institutions to speed up fundraising for QDII funds.”

QDII allows mainland institutions such as mutual funds to raise capital from local investors in yuan before converting them into foreign currencies for purchasing overseas shares.

The institutions need to receive approval from the Chinese foreign-exchange regulator to make overseas investments, and the scheme is capped by a quota set by central government.

Fifteen QDII funds have been launched already this year, netting about 10 billion yuan of capital between them. Five are currently in the process of fundraising while another 11 are awaiting approval from the regulator.

The total of 31 is a significant increase on the previous record of 22 QDII funds launched in 2011.

Investors have been anticipating that the cross-trading system linking the Shenzhen and Hong Kong stock markets would debut this month, although this could be delayed until early December, according to some fresh mainland media reports. The stock connect scheme is expected to further boost to fundraising through QDII.

QDII funds showed signs of attracting mainland investors because it’s an efficient tool to help them hedge against currency volatility
Steven Jia, president, Daokun Asset Management

According to a survey by the Asset Management Association of China, 75.6 per cent of mainland investors are considering allocating part of their portfolio to overseas-listed shares.

The survey also found that 55.8 per cent of the respondents would channel their investment through the QDII scheme to access foreign-listed equities.

Before the launch of the Shanghai-Hong Kong stock link programme two years ago, QDII was one of the few legal means through which mainland investors could buy foreign shares.

To date, Beijing has granted a QDII quota of about US$100 billion to mainland institutions.

Last year, the mainland’s QDII funds posted a combined 3 per cent drop in net asset value, Galaxy Securities said in a research report.

Wealthy mainlanders have been increasingly seeking to diversify their holdings this year amid expectations of further depreciation in the yuan.

Stocks and properties outside the mainland have emerged as the two major investment choices for those wishing to transfer assets abroad.

With the Shenzhen-Hong Kong stock connect scheme set to come online soon, buying interest in H shares appears to be strong as investors believe they can ride a short-term rally to make profits.

The system linking the Shenzhen and Hong Kong stock exchanges will enable mainland investors to trade at least 100 more Hong Kong-listed shares than can currently be traded through the existing Shanghai-Hong Kong connect programme.

Currently, the A shares of dual-listed firms - those listed on both the mainland and Hong Kong stock markets - trade at a more than 26 per cent premium to their H-share counterparts.

“Despite a rebound on the A-share market, local investors are still wary about the outlook,” said Zhou Ling, a hedge fund manager at Shanghai Shiva Investment. “Many of them would rather play Hong Kong stock because they believe buying overseas-listed shares could help dodge a currency devaluation which might hit five to 10 per cent in the next few quarters.”

The key A-share benchmark has recently climbed above the 250-day moving average, a sign that the mainland stock market is likely to turn bullish after more than a year of woeful performance. A stock market rout between mid-June and late August last year wiped out US$5 trillion of market value.

But a slowing economy and lacklustre company performance would counteract a sustainable rally, analysts said.