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QDII funds to receive new quotas

(Shanghai Daily)
Updated: 2009-10-27 16:26

China has granted new quotas to domestic funds to invest in overseas securities for the first time in 17 months, reflecting the country's stepped-up effort to diversify foreign-exchange assets as the global economy recovers.

E Fund Management obtained a $1 billion quota from China's forex regulator while China Merchants Fund Management was granted $500 million under the Qualified Domestic Institutional Investor program, company sources said yesterday.

The approvals were given on Friday to E Fund and China Merchants Fund, both of which are based in Shenzhen. Company officials said yesterday they would issue statements to announce the news soon.

Sources close to the State Administration of Foreign Exchange said that more domestic fund companies are expected to receive new quotas in the coming weeks as the country moves to boost the QDII program.

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"It's a signal that regulators have deemed that the worst of the global financial crisis has passed," said Wu Zhiguo, a Guohai Securities Co analyst. "They might think it's much safer to channel forex capital outside for diversification now than it was a year before."

The QDII program, launched in 2006, allows domestic lenders, fund houses, securities brokers and insurers to trade stocks and bonds overseas. Each institution must apply to the SAFE for a forex quota before investing abroad.

The last domestic financial firm allowed to invest in overseas securities was Bank of Communications Schroder Fund Management, which obtained a $2 billion QDII quota in May 2008. By then, 56 Chinese institutions had been granted a combined quota of $55.95 billion under the QDII program.

After that, Chinese financial regulators virtually suspended granting investment limits on concern over volatility in overseas markets and the negative effect of capital outflow on domestically traded securities, sources said.

"One of the biggest regulatory worries is that hot money could flow back and inflation may be stronger than expected," said Chen Weiheng, an investment adviser at the Bank of China. "The resumption of the QDII program is the countermeasure."

Forex surge

China's forex reserves surged $141 billion in the third quarter to a record $2.273 trillion, the People's Bank of China said on October 14. Some economists believe the nation's economic recovery has helped to lure back speculative capital.

China's economy advanced 8.9 percent in the July-September period, compared with a rise of 7.9 percent in the second quarter and 6.1 percent in the first, as investment and consumption continued their strong momentum.

The inflows of foreign capital are likely to help cause consumer prices to rise and complicate the country's implementation of a loose monetary policy to sustain its economic rebound, analysts believe.

Sources said that at least a dozen more domestic fund houses, including Changsheng Fund Management and Bosera Asset Management, have applied for quotas.