REGULATIONS
QDII Update: Chinese Regulator Opens Door for Innovative Product Design
July 13, 2007
Taylor Hui, Deacons

On 10 May 2007, the CBRC issued a revision to its qualified domestic institutional investors (QDII) scheme called the Notice on the Adjustments to the Overseas Investment Scope of Overseas Wealth Management Business of Commercial Banks on behalf of their Clients. This notice widens the investment scope permitted under the QDII scheme applicable to commercial banks (including Chinese banks and approved foreign banks in China). When the QDII scheme was announced a year ago, the QDII investment products (which accept renminbi (RMB) denominated subscriptions from local Chinese investors and convert them into foreign currencies before investing offshore) offered by onshore banks were limited in exposure to bonds and fixed income instruments. Commercial banks are required to apply for QDII investment quotas before issuing QDII products. It is reported that about US$14bn in investment quotas have been granted to date.

The amended QDII scheme may have a significant impact on the Hong Kong stock market and on mutual funds authorised in Hong Kong, with the effect spreading to other markets gradually when the QDII investment quotas are increased. Global fund managers can now also act as investment managers for the QDII products that invest in equities. The key points of the new scheme are summarised in the box below:

Adjustment items	Details
Investment scope	Widened to cover equities, mutual funds and structured products, in addition to bonds and fixed income statements.
Investment restrictions	Equities must be listed on an overseas stock exchange. Investments in listed equities must not exceed 50% of the net asset value of a QDII product that invests in equities. The holdings in a single stock must not exceed 5% of the net asset value of a QDII product that invests in equities. The issuer of a structured product must have a credit rating of A or above assigned by an international credit rating agency. Investments are prohibited in derivative products of commodities, hedge funds and securities with credit ratings below BBB assigned by an international credit rating agency. Derivatives, such as swaps and forwards, may be used for hedging purposes only.
Permitted stock exchanges	The stock exchanges must be regulated by regulatory authorities that have signed a memorandum of understanding (MOU) on regulatory cooperation with the CBRC relating to the wealth management business of commercial banks on behalf of their clients.
Permitted mutual funds	The mutual funds must be authorised, approved or registered with regulatory authorities that have signed the MOU with the CBRC.
Permitted overseas fund managers	Any fund managers appointed must be approved or registered with regulatory authorities that have signed the MOU with the CBRC.
Minimum investment	For QDII products invested in equities, the minimum investment per investor is RMB300,000 (US$40,000).

To date, the Hong Kong Securities and Futures Commission is the only regulatory authority that has signed an MOU with the CBRC. Other overseas regulators may be expected to enter into an MOU with the CBRC.

The new policies on QDII products will initially benefit the Hong Kong stock market, the mutual funds and the fund managers regulated in Hong Kong. Global fund managers who already have mutual funds authorised in Hong Kong will have indirect access to Chinese investors. By buying QDII products that invest in mutual funds and structured products, the Chinese domestic investors will also have indirect access to global markets and securities. The new scheme introduced by the CBRC notice provides commercial banks with potential for innovative QDII product design.

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