Mainland brokers to use QDII2 for expansion

The chairman of the Chinese Securities Association of Hong Kong told a top business audience on Monday that he expects the launch of the second Qualified Domestic Institutional Investor program by the end of this year, and for it to "fundamentally alter the investment structure of the Hong Kong capital market" by allowing further overseas expansion by mainland brokerages.

Yim Fung said that the launch of QDII2 means mainland finance houses based in Hong Kong can leverage on the city's financial competitiveness to seek more international business.

He added the investment structure will be altered "because domestic individual investors are more prone to investing in small-to-medium-sized, high-growth companies rather than large-capitalization stocks".

"We expect the former types of shares to be more popular under the QDII2 program," Yim said.

Guo Shuqing, then the chairman of the China Securities Regulatory Commission, said in mid-January that the CSRC is considering launching QDII2, an expansion of the original QDII program, to permit domestic individual investors to invest in overseas asset markets.

Hong Kong was the first, and remains the largest, destination for the QDII scheme, which was implemented in 2006.

Under the scheme, authorized banks, fund management companies, brokerages, insurance companies and trust companies based in the mainland are allowed to invest in their own funds or those of their clients in certain overseas financial markets, including Hong Kong, subject to investment quotas.

By the end of last year, the State Administration of Foreign Exchange had approved a total QDII quota of $85.6 billion to 107 domestic institutional investors.

"The authorities will allow domestic individual investors to utilize QDII2 to invest in the Hong Kong asset markets first, and then permit them to invest in other overseas markets," Yim said.

"This is because domestic individual investors are more familiar with this market."

Yim said that if QDII2 is launched, it will provide a good stimulus for mainland brokerage companies to utilize the city as a platform for pursuing overseas expansion.

"Chinese language familiarity, the free flow of information, a robust regulatory regime, and a well-developed risk management system - all these attributes are attracting mainland brokerage firms to gain a foothold first in Hong Kong, before considering overseas expansion," Yim added.

Despite Hong Kong's securities market still being dominated by US and European brokerage houses, the Chinese Securities Association of Hong Kong says there are nearly 60 mainland financial institutions with operations in Hong Kong, including banks, brokerage firms, fund management companies, futures dealers and insurance companies.

The Hong Kong-based mainland firms encounter various business hurdles, however, including low levels of capitalization and internationalization, and having to comply with the financial regulatory standards of the mainland and Hong Kong, which have curtailed their profitability, said the association.