After months of uncertainty, China finally gave a timetable to the channel for outward-bound capital known by the acronym QDII. Shortly afterward, the first investor was approved for the program.
The head of the State Administration of Foreign Exchange said in late February that he expected China's proposed QDII (qualified domestic institutional investor) program to be rolled out "sometime in 2004."
Days later, the National Council Social Security Fund (NCSSF) was approved by the State Council to invest in overseas capital markets, becoming the first Chinese institution to be approved for QDII investment. The fund was expected to invest in Hong Kong.
The QDII program will allow investment by approved Chinese investment banks, pension funds and insurance companies in foreign capital markets. It is the outbound counterpart to the qualified foreign institutional investor (QFII) program that was launched in December 2002. QFII allows foreign investors, primarily banks and investment funds, to invest in selected bonds and A-shares.
Since the launch of the QFII scheme, the number of investors has steadily increased, as has the amount they can invest. There are no investment caps or quotas known for QDII investment, nor have there been any foreign capital markets ruled out from QDII investment.
The QDII scheme is one of several interlinked items on Beijing's economic agenda for 2004, including the much-discussed flotation or revaluation of the renminbi. The driving force behind these issues is the further opening of China's economy to greater integration with the outside world.
"QDII will have to happen soon," one analyst said. "Now that the currency regime is changing, then the ground should be opened for QDII."
The Chinese government said that the QDII program will help relieve the liquidity imbalance that has emerged with the massive inflows of foreign capital in the form of investment and currency speculation.
A mainland-based analyst said it is difficult to predict what the impact of QDII investment will be. "It'll have to be seen in context once China is a developed market, but there's no chance of the money going out via QDII to be able to offset the massive amount of money coming in from the outside."
QDII investment will provide two benefits to approved investors, he continued. It will enable firms to diversify their investments and will serve as a conduit for understanding foreign markets he said. "In the long term, why shouldn't Chinese firms be able to hedge their bets in developed markets with world-class corporations?"