Safe resumes QDII quota handouts

On Friday, the State Administration for Foreign Exchange (Safe), the forex arm of the People's Bank of China, provided quota to two Chinese fund management companies to launch products under China's qualified domestic institutional investor (QDII) programme.

These are the first foreign-exchange quotas allowed for QDII funds in 17 months.

Peter Alexander, director at Shanghai-based consultancy Z-Ben Advisors, says: "Policy change is typically the key driver of market expansion in China and Friday's events signal strongly to us that the QDII business is about to accelerate very quickly."

Guangzhou-based E-Fund received approval to invest up to $1 billion overseas, and Shenzhen's China Merchants Fund Management Company was granted $500 million. Both will launch their debut QDII products, with E-Fund targeting Asia ex-Japan equities, and China Merchants ready with a global resources fund.

Z-Ben Advisors in Shanghai says at least four more firms are expected to win quota over the next two months. These include Bosera, Changsheng, China Universal and UBS SDIC. There may be up to $4 billion of quota issued in this period.

There is a current backlog of around 20 QDII quota applicants, and Z-Ben says the entire slate could be cleared over the course of 2010.

Safe has also made known its preference for more customised QDII products.

QDII funds had a rocky 2008, as the first batch had been launched during the peak of the 2007 bull run in global equities. But this year, as markets have recovered worldwide, fund houses have been itching to launch new products, to take advantage of low valuations.

About 20 firms have won the right from the Chinese Securities Regulatory Commission to launch QDII products but have been held up by Safe.

China Merchants is said to be ready to launch its QDII fund now. E-Fund is in the midst of marketing a Shenzhen-tracking ETF and may not be able to focus on the QDII fund for several weeks.