Retail funds are flooding into exchange traded funds (ETFs) and mutual funds issued through the Qualified Domestic Institutional Investor (QDII) program, one of the limited avenues for Chinese capital to be invested internationally. As a result, managers overseeing these funds are racing to secure additional quotas within the tightly regulated framework of the program.
Instead of confining their investments to Hong Kong equities, those participating in QDII products are now looking beyond their borders, seeking funds that provide access to markets in the U.S., Japan, and even emerging economies such as Vietnam and India. This shift comes as the Chinese economy faces challenges, prompting analysts to note the change in investor behavior.
According to data from Morningstar, a record-breaking 38 QDII funds were launched this year until August 17, surpassing the 31 funds launched in the previous year.
With approximately $165.5 billion of the QDII quota nearly exhausted, fund managers are reporting an increasing demand for more quotas, as domestic investors explore alternatives to the diminishing values of stocks and real estate within the country.
Throughout the year, capital has been flowing out of China, not only through QDII funds but also through connections like Stock Connect and Bond Connect with Hong Kong, thereby complicating efforts by authorities to stabilize the yuan and restore confidence.
In contrast to the blue-chip CSI300 index, which has declined around 2% this year and plummeted 22% in 2022, the Dow Jones Industrial Average has risen by 4.3%, and the Nasdaq has surged by roughly 30%.
Obtaining additional QDII quota approvals from the State Administration of Foreign Exchange (SAFE) has proven to be a gradual process, with around $5.8 billion in quotas already granted in two rounds this year.
Tianhong Asset Management, supported by Ant Financial, introduced three QDII products in the first half of the year. These products are designed to track the Nasdaq 100 Index, overseas high-end manufacturing shares, and overseas electric vehicle stocks. Despite achieving a record size for its fund invested in Vietnam, Tianhong received a fresh QDII quota of $120 million in July, which was less than anticipated.
The QDII program, initiated in 2006, continues to be a significant avenue for mainland Chinese investors to invest overseas, alongside the Qualified Domestic Limited Partnership (QDLP) program.
The substantial demand has propelled the combined size of QDII mutual funds beyond 400 billion yuan ($54.85 billion) by the end of July, marking a first-time occurrence, as reported by the Asset Management Association of China (AMAC). By July, a total of 255 QDII mutual funds were available in the market, according to AMAC.
Guangfa NASDAQ-100 ETF, one of the largest QDII ETFs, saw its assets under management (AUM) increase by 48% in the first half of the year, reaching 17 billion yuan. Some other popular QDII funds, such as E Fund’s S&P Information Technology Index Fund and S&P 500 Fund, had to temporarily suspend subscription earlier in the year to manage their fund sizes.
JP Morgan Asset Management, which operates a significant cross-border business in China, observed rising interest in offshore funds and announced the launch of a new Nasdaq 100 QDII fund in September, following the more than threefold growth of its Japan-focused equity fund in the first half of 2023.