Fund managers get creative to beat quota squeeze amid Chinese demand for offshore assets

Soaring demand from Chinese investors for offshore investments has left foreign banks and fund managers scrambling to ration outbound-investing quotas, despite the recent sell-off in the US and Japanese markets.

To cope with the surging appetite, firms using China’s Qualified Domestic Institutional Investor (QDII) programme are taking steps to get around the quota crunch, executives from a foreign bank, fund house, and wealth management units said.

China has approved a total of US$167 billion QDII quotas as of end-July to 189 institutions, with foreign firms each given US$300 million to US$4.7 billion. However, usage of the quotas is not publicly available.

Demand for QDII products, which allow mainland investors to buy overseas stocks, bonds, funds and structured products, is rising in the latest sign of waning confidence in local assets. Turnover on Monday of domestic A-shares amounted to 496 billion yuan (US$69 billion), the least since May 2020.

An underperforming stock market at home is driving demand for offshore assets from mainland Chinese investrors. Photo: Bloomberg

The steps to overcome quota limits underscore the challenges for foreign financial firms to fully leverage their global network and product suites in competition with peers in China, according to Jia Zhi, head of fund of funds, asset management at Hualin Securities.

BlackRock, JPMorgan Chase and Goldman Sachs in recent years set up businesses in mainland China or boosted ownership of local units.

A manager at an Asia-headquartered lender said it has not run out of quotas before and has no reaction plan regarding the situation. With demand building up in recent months, his firm has now introduced measures, such as assigning quotas between branches, to avoid hitting the caps.

An executive from a US fund house in China said his company had in recent months tried dropping institutional clients to free up quotas for new flows into retail funds, which earn higher fees.

Companies are resorting to subscription caps, but those are only a temporary solution until additional quotas become available, said Nicholas Omondi, director at consultancy Z-Ben Advisors. China’s foreign exchange regulator does not grant new quotas regularly.

A senior executive at a foreign bank’s wealth management company said peers with little depleting quotas are introducing swap structures with their parent companies offshore to circumvent the limits in a growing lucrative business.

With those swaps, monthly new flows into offshore-investing products could reach 1 billion yuan at one bank wealth unit, the executive added.

All foreign firm executives declined to be named as they are not authorised to speak to media.

The quota squeeze has intensified as Chinese investors crave higher returns offshore, given the sluggish performance of local assets in a weak economy hurt by a prolonged property market downturn. A rout in US and Japanese stocks last week freed up some quotas as valuations dropped and some investors redeemed some of their funds, Hualin’s Jia said.

“In the long run quotas are limited and will be filled up quickly,” he added.

The price levels of some QDII funds have now rebounded, reinforcing investors’ views on holding, Z-ben’s Omondi said.

The foreign bank manager said several investors had visited its branches, demanding face-to-face meetings to secure QDII quotas.

“The question is, after the sell-off, whether investors still want to explore global instruments besides onshore market,” the banker said. “And the answer is clear now. QDII is a must when people worry about onshore.”

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