Late last week China’s State Council announced its approval of the hotly anticipated Qualified Domestic Individual Investor program (referred to as “QDII2”). QDII2 offers an unprecedented channel for Chinese investors to invest offshore and promises to be a significant step in the liberalisation of China’s investment landscape and capital account.
The QDII2 announcement closely follows recent reforms easing restrictions on foreign investment managers carrying on business in China. Together, these reforms should allow foreign managers direct access to the Chinese HNW market, which is estimated to be over RMB 50 trillion.
Initially the program will be limited to the Shanghai Free Trade Zone. It will then be rolled out to the rest of Shanghai and five other pilot cities: Tianjin, Chongqing, Wuhan, Shenzhen and Wenzhou. Although timelines are not yet confirmed, there are strong expectations that the program will be implemented before the end of 2015.
Chinese investors are generally able to convert only US$50,000 of RMB in any year and can invest offshore only indirectly by purchasing financial products through Chinese financial institutions. Under QDII2 investors who are resident in one of the approved zones and who have at least RMB 1,000,000 in financial assets, will be subject to relaxed currency conversion restrictions and will be able to make direct offshore investments.
QDII2 will permit a broad range of offshore investments. Eligible investment classes are expected to include:
- shares, bonds, funds, insurance products, foreign exchange and derivative products;
- greenfield and joint venture projects; and
- real estate.
To make a direct offshore investment under QDII2, a Chinese investor will be required to open a free trade bank account for overseas direct investment, which will consist of an onshore RMB account and an onshore foreign exchange account.
Additional reforms including 100% foreign ownership of PRC investment managers
The QDII2 initiative complements China’s recent commitment to allow 100% foreign-owned investment management firms to engage in private funds management on behalf of local institutions and HNW investors. Previously, offshore fund managers were required to partner with local managers via joint venture structures with the offshore ownership capped at 49%.
Together with the recent Stock Connect programs between the stock exchanges in Hong Kong and each of Shanghai and Shenzhen, and the China – Hong Kong mutual recognition of funds program, these reforms provide unprecedented opportunities to offshore managers looking to access China.
The race is on to claim first mover advantage.