Investors’ reactions to China’s Qualified Domestic Institutional Investor [QDII] program remains flat, even though the China Banking Regulatory Commission [CBRC] has been gradually liberalizing the program through entering into a memorandum of understanding with the United Kingdom and Singapore. Nearly all QDII products which have been made available to investors to date have been undersubscribed, according to a report from Dechert LLP. “Chinese who are investing domestically in China have a much [more] favorable market to invest,” said Keith Robinson, partner at Dechert. “The global market has been pretty choppy in the last couple of months, and I think it does discourage people generally from investing.”
In the short term, Robinson said that subprime loans will also be a problem for investors. “At this moment, the markets just don’t know if they have gotten to the bottom and where the problems are, but I think as the year goes, it will become less of a problem. Once you figure out what’s going on and are able to address it, the market will calm down and get back to business as usual. I think we just haven’t yet convinced ourselves that we have gotten to the bottom of the subprime [issue].”
The CBRC will soon enter into a memorandum of understanding with the US Securities and Exchange Commission, followed by Germany and Japan, further accelerating the pace of pushing the memorandum of understanding with foreign jurisdictions forward.
Yet the market may not be ready if the QDII program moves too hastily at once. “Currently, the Yuan is not freely convertible. Throwing the door open too quickly may generate concerns about devaluing the Yuan and potentially for creating black markets,” Robinson said. Also, the lack of sufficient experience of investors and regulators in investing abroad is another challenge for the program, he said.
In the long run, Robinson believes that investors’ appetite for the program will gradually return after the subprime crisis eventually dies away. The Chinese regulatory authorities, banking authorities, and the security authorities will in time liberalize the program and the amount of money involved, helping non-Chinese investment managers to reach local investors in China. “This will give non-Chinese financial service firms much easier access to the huge amount of money that is otherwise invested within China,” he said.