Biggest Chinese mutual funds near limits on offshore investment

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China’s biggest mutual funds are nearing government limits on offshore investment, as they seek higher returns elsewhere against a backdrop of slower growth at home.

China’s so-called Qualified Domestic Institutional Investor scheme, introduced in 2006, allows banks, brokerages and asset managers to bypass the country’s strict capital controls and buy securities abroad.

Beijing has steadily increased the total quota from $87bn a decade ago to its current level of $166bn across 184 institutions but has only made small additions since late 2021.

While no official data is provided on the use of the quota, several investors and legal representatives across the asset management industry said rising appetite for overseas-targeted funds was pressuring individual allowances.

An analysis of public fund data shows fund management companies Guangfa, E Fund and China Asset Management are close to the limits published by the State Administration of Foreign Exchange, which administers the scheme.

The rising demand offers insight into how yield-hungry funds across China’s nascent but rapidly growing asset management industry are navigating Beijing’s strict capital control regime in order to participate in overseas market rallies. It also comes as Beijing grapples with slower economic growth, weak financial returns and a wider loss of confidence.

“There’s a huge demand for outbound investment funds this year,” said Ding Wenjie, investment strategist of global capital investment at China Asset Management, who pointed to the “relatively high returns” on overseas stocks.

Across the fund management industry, incomplete figures make gauging total use difficult. Data from consultancy Z-Ben Advisors shows mutual funds held $44.5bn in QDII funds at the end of July, up from $33bn at the end of 2021. This is against a total available quota of $75bn for the fund management industry. Some small funds may not have the resources to use their quota, while certain fund investments may not be included in available totals.

The rest of the $166bn quota is held by banks, insurers and trust companies.

“Many of the top players are running low or tight with their QDII quota . . . and we do see a lot of demand from retail investors,” said Ivan Shi, head of research at Z-Ben Advisors.

One person in the industry in mainland China suggested higher yields in the US were behind the rise in demand, noting that Beijing had made only small increases in the quota in recent years. Last month the State Administration of Foreign Exchange added $2.7bn in a move seen as a response to high demand.

The QDII scheme is part of a wider policy of controlling flows of money in and out of China. The controls limit each individual’s outbound expenditure to $50,000 a year, excluding education and tourism expenses. When investors in China exit QDII funds, they receive the proceeds domestically in renminbi.

Industry participants pointed to high appetite for Japan’s Topix and Nikkei indices, which have rallied this year compared with Chinese counterparts. The combined fund size of the four exchange traded funds in mainland China that target Japanese securities increased nearly fivefold to $1.65bn from March to July, according to data from financial information provider Wind.

A mutual fund manager at one the four ETFs said it was considering adding more offshore portfolios through a Hong Kong subsidiary, a move that would allow it to bypass the QDII quota.

The website of the China Securities Regulatory Commission lists dozens of funds currently awaiting approval for QDII-related products. A legal adviser for one mutual fund house said while mutual funds and securities companies had in many cases almost reached their limits, they were saving some for bets on “possible year-end rallies in offshore shares”.

E Fund, Guangfa Fund and the State Administration of Foreign Exchange did not immediately respond to requests for comment.

Additional reporting by Leo Lewis in Tokyo