QDII stands for Qualified Domestic Institutional Investors.  Contrary to QFII by which China permits qualified foreign institutional investors to invest in listed domestic securities denominated in local currency, QDII is an investment scheme under which domestic institutional investors authorized by the government could invest in the overseas capital markets under the foreign exchange control system in China.

QDII was initially proposed by Hong Kong government to attract mainland capital into Hong Kong stock market, wishing that it would boost the stock market after the Asian financial crisis. On April 13, 2006, China announced QDII scheme, allowing Chinese institutions and residents to entrust Chinese commercial banks to invest in financial products overseas, subject to approval by China Securities Regulatory Commission (CSRC).

QDII investment was at first limited to fixed-income and money market products. After granting 15 banks and funds a total quota of US$14.2 billion to invest overseas, the Chinese government announced on May 11, 2007 to widen the scope of the QDII investment. With certain restrictions, banks can now offer stocks related products. The net value of a QDII product involved in stocks must not exceed 50%, and the net value of a single stock is capped at 5%. The minimum commitment by each client is 300,000 Chinese yuan (renminbi). The stocks invested in or the fund linked with must be listed in or approved by the countries that have signed an Memorandums of Understanding with CSRC.

When QDII was first proposed, the China Securities Regulatory Commission was enthusiastic in promoting the scheme, hoping that it would help cool down the stock markets. On the other hand, the State Administration of Foreign Exchange’s response was lukewarm, due to foreign exchange control concerns. Now the table has been turned. Due to growing pressure on the appreciation of renminbi, SAFE is now more active in promoting the scheme in order to maintain the stability of RMB exchange rate. On the contrary, the Securities Regulatory Commission is becoming more conservative, because the formal adoption of such a scheme might affect the A and B share markets which have plunged a lot after the global financial crisis.

On April 8, 2008, an agreement between the China Banking Regulatory Commission and the US Securities and Exchange Committee made it possible for Chinese individuals to invest in the US stock markets. In October, 2009, State Administration of Foreign Exchange (SAFE) announced the approval of two new QDII funds to be managed by E Fund Asset Management Company and China Merchants Fund. The sizes of the funds were US$1bn and US$500m, respectively.

Unlike QFII which is attractive to foreign investors, some QDII members are frustrated by rigid regulations, costs and slim profits. To comply with regulations, a QDII member is required to employ at least 4 investment consultants with overseas investment experience at high costs. The annual remuneration for an overseas senior executive with 5 years or more experience is RMB 5 million, and those with 3 years experience is RMB 2 million. Payment for those 4 executives costs RMB 10 million. In addition, a sophisticated IT system costs RMB 10 million. Athough a QDII member is able to collect managment fees, which is around RMB 7.5 million for a fund with a size of RMB 500 million, it has to invest at least RMB 20 to 30 million in order to become a QDII member. On the other hand, Chinese investors’ responses to QDII subscriptions have been weak since 2008.  Some small and medium QDII members are so frustrated that they are considering withdrawal.

Hua An International Balanced Fund was the first pilot project for QDII and was only allowed to use hard currency, instead of RMB, for its investment, to reduce risks in connection with QDII. Many banks in China are laying the ground work in preparation for the formal adoption of QDII.

By June 2010, China Banking Regulatory Commission had expanded QDII program to Malaysia, Hong Kong, the UK, Singapore, Japan, the US, Australia, South Korea, Luxemburg, Germany, and Canada.

Remark: USD 1 = RMB 6.78

Related articles:

List of China QDII Funds, April, 2011

QDII Member List, August 2010

Hong Kong Stock Through Train

What is QFII

QFII is Allowd to Trade China Stock Index Futures