China’s QDII programme allows individuals to invest in offshore products through asset managers (asset management firms apply for the QDII quota and offer QDII funds to investors).
The next version, QDII2, if approved will allow individual investors to invest directly offshore into stocks and bonds.
Aldcroft finds the QDII2 an interesting development given that that the predecessor, the QDII programme, has not been that successful and that the Mutual Recognition of Funds (MRF) scheme, another similar channel, seems to be “stuck”.
“Is it really an opportunity that QDII2 should be brought forward when we still have a lot of funds in Hong Kong that can’t even get approved under the Mutual Recognition of Funds scheme?”
In addition, the Chinese investor base is not well-suited to invest directly in overseas products.
“[Chinese investors] would buy what they are familiar with, they buy things that they understand,” he said, adding that Chinese investors are familiar with very few global companies or brand names. “So what is it that QDII2 is going to do that will change that situation? I suspect not a lot.”
China’s Securities Administration of Foreign Exchange (SAFE) is seeking approval from the State Council for the QDII2 programme, according to a Bloomberg report, citing unnamed sources. However, the programme is not expected to be implemented this year as authorities want to control capital outflows, according to the report.
The QDII2 programme was initially expected to launch in 2015 but was delayed as authorities wanted to clamp down capital outflows. At the same time, the regulator stopped issuing new QDII quotas.
China also stopped issuing Qualified Domestic Limited Partnership (QDLP) quotas late last year in order to stem outflows. The QDLP programme allows foreign asset managers to raise up to $100m of domestic capital from professional investors who want to invest in offshore products.
The faltering QDII
Aldcroft said that the oldest channel for Chinese to invest offshore, the QDII programme, has not done well. Firms launched the first QDII products in 2007, just before the global markets collapsed in 2008.
“Retail investors who took advantage of that got heavily burdened.”
However, there has been a pick up in interest in QDII funds. Assets grew by 48.3% to $12.7bn for the full year 2016, with fixed income funds dominating the growth of investment in QDII funds.
There has also been some institutional use for the QDII, according to Aldcroft. But the freeze on QDII licences creates a lack of interest.
On the MRF front, Aldcroft wants to see more Hong Kong-domiciled products sold in the mainland. There are only around eight Hong Kong-domiciled products approved for sale in the mainland, while there are around two dozen China-domiciled funds available for sale in the SAR.
Although Hong Kong-domiciled funds sold through the MRF have raised around $1.4bn in net assets, most of the capital went into one fund managed by JP Morgan Asset Management.
Out of all the different channels in which domestic Chinese investors can access offshore investments, Aldcroft believes that the Stock Connect has become the most successful.
“There’s a lot of [Chinese investor] money coming into Hong Kong equities. That should continue, especially if Hong Kong stocks continue to perform quite well,” he said.
