By Selena Li and Alessandro Diviggiano
HONG KONG (Reuters) – Rising demand from Chinese investors for offshore investments has prompted foreign banks and fund managers to reduce their overseas investment quotas despite a recent wave of selling in the U.S. and Japanese markets.
To meet growing demand, companies using China’s Qualified Domestic Institutional Investor (QDII) program are taking steps to circumvent the quota bottleneck, executives of a foreign bank, fund house and asset management units said.
China has granted QDII quotas totaling $167 billion to 189 institutions by the end of July, with foreign companies receiving between $300 million and $4.7 billion each. However, the use of the quotas is not publicly available.
Rising demand for QDII products – which allow Chinese investors in mainland China to purchase stocks, bonds, funds and structured products abroad – is the latest sign of investors’ lack of confidence in local assets.
Domestic A-share turnover reached its lowest level since May 2020 on Monday, with only 496 billion yuan ($69 billion) traded during the session.
The moves to overcome quota restrictions underscore the challenges for foreign financial firms in fully leveraging their global network and product range to compete with rivals in China, said Jia Zhi, head of fund of funds and asset management at Hualin Securities.
BlackRock (NYSE:), JPMorgan and Goldman Sachs have established offices in mainland China or increased the proportion of local offices in recent years.
“We have never seen our quotas exhausted and have no response plan,” said a bank manager at an Asia-based bank.
In view of the increased demand in recent months, his company has now introduced measures such as allocating quotas to branches in order to avoid reaching the upper limits.
A manager at a U.S. fund house in China said his company had been trying to shed institutional clients in recent months to free up quotas for new inflows from investors investing in mutual funds that charge higher fees.
Companies are resorting to subscription caps, but this is only a temporary solution until higher quotas are available, says Nicholas Omondi, director at consulting firm Z-Ben Advisors. China’s foreign exchange regulator does not regularly issue new quotas.
A senior executive at a foreign asset management company said asset management units of banks with small quotas remaining were setting up swap structures with their offshore parent companies to circumvent restrictions in a growing, lucrative business.
With these swaps, monthly new additions to offshore investment products at a single bank’s asset management unit could reach one billion yuan, the manager added.
The officials of all foreign companies declined to be named because they are not authorized to speak to the media.
Unrestricted demand
Quota pressures have intensified as Chinese investors seek higher returns overseas amid sluggish local asset performance in a weak economy hit by a prolonged real estate downturn.
A big sell-off in U.S. and Japanese stocks last week released some quotas as valuations fell and some investors withdrew some of their funds, Hualin’s Jia said.
“But in the long term, quotas are limited and will be quickly exhausted,” he added.
The price levels of some QDII funds have now recovered, which strengthens investors’ stance in holding the funds, said Omondi of Z-ben.
The foreign bank manager said several investors had visited the bank’s branches and requested face-to-face meetings to secure QDII quotas.
“The question is whether investors will want to explore global instruments in addition to the domestic market after the sell-off,” the banker said.
“And the answer is now clear: QDII is a must if people are worried about onshore business.”
(1 US dollar = 7.1744 renminbi)
(1 US dollar = 7.1751 Chinese renminbi yuan)
