What Is a Qualified Domestic Institutional Investor? (QDII)
Let me explain what a Qualified Domestic Institutional Investor, or QDII, really is. It's an institutional investor that has met specific qualifications to invest in securities outside their home country. You see, institutional investors are organizations or groups with a lot of money to invest, and QDII programs let these large domestic investors put money into foreign markets. Think of examples like insurance companies, banks, funds, and investment companies that might aim to become a QDII.
These programs are popular in places like the People's Republic of China, where the China Securities Regulatory Commission (CSRC) sometimes opens limited paths for institutional investors to buy foreign-based securities. There's also a similar initiative called the Qualified Domestic Limited Partnership (QDLP) for outbound investments in China.
Key Takeaways
- A qualified domestic institutional investor (QDII) is an institutional investor that meets qualifications to invest in securities in foreign markets.
- QDII programs started in China in 2006 and allow five types of Chinese entities to invest abroad: insurance companies, banks, trust companies, funds, and securities firms.
- Entities that want to participate in the QDII program must first receive approval from China's State Administration of Foreign Exchange (SAFE), which is also responsible for establishing the investment quota amount allowed each participant.
- Once approved, entities are allowed to make investments in the overseas markets for both themselves or on behalf of retail clients.
- Firms can make investments in equities, fixed income, and derivatives in specified overseas markets.
Understanding Qualified Domestic Institutional Investor (QDII)
QDII programs are useful in markets where capital isn't fully open to everyone. China introduced its QDII in April 2006, allowing five types of entities to invest abroad: insurance companies, banks, trust companies, funds, and securities firms.
If you're an entity interested, you must apply and get approval for a license before investing overseas, either for yourself or retail clients. Once approved, you can invest in fixed income, equities, and derivatives in specified markets. China's State Administration of Foreign Exchange (SAFE) handles approvals and sets the quota for each participant.
The 2015 China Stock Market Crash
SAFE halted QDII quotas after the 2015 stock market crash in China, which caused huge capital outflows. Factors like excessive margin loans from brokerages pumped up the market, but then margin calls triggered selling and volatility.
After two years, China started granting licenses to global asset managers under the Qualified Domestic Limited Partnership (QDLP) program, similar to QDII. These managers could raise money in China for overseas investments over six months. Firms like JPMorgan Chase, Standard Life Aberdeen, Manulife Financial, Allianz, BNP Paribas, AXA, Robeco, and Mirae Asset got involved. This showed economic strength and helped revive QDII.
Revised Requirements for Qualified Domestic Institutional Investor (QDII)
In 2018, Chinese regulators updated these programs. For instance, an institution's QDII quota is capped at 8% of its fund assets, not including money market funds. Also, if you've used less than 70% of your current allocation, you can't apply for more.
In April 2018, SAFE mentioned considering more reforms after economic recovery. They gave new QDII quotas of $8.34 billion to 24 firms, with 12 being existing investors and the rest new. This pushed total QDII quotas over $98.3 billion. President Xi Jinping stated he'd keep opening the economy to outbound investments as markets stabilized and capital flight concerns dropped.
Qualified Foreign Institutional Investors (QFII)
Similar to QDII is the Qualified Foreign Institutional Investor (QFII) program. It lets licensed international investors access mainland China's stock exchanges to trade stocks. Before 2002, foreign investors couldn't buy or sell on Chinese exchanges. QFII relaxed those controls, authorizing some foreign institutions to trade on Shanghai and Shenzhen exchanges.
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