(Yicai) Aug. 31 -- China has hiked the investment quota for Qualified Domestic Institutional Investors, a program which allows domestic institutional investors to invest in foreign securities markets, by USD6.8 billion, offering some relief to tight quota supply as the growing appeal of overseas assets and rising appetite for risk diversification drive stronger investor demand.

The latest quota, approved by the State Administration of Foreign Exchange on Aug. 28, has pushed the market’s cumulative total to USD183 billion. Combined with the first round of additional quotas in March, a total of USD12.14 billion in QDII investment quotas has been added this year, compared with only USD3.08 billion in the whole of last year, indicating a significant acceleration in the pace of quota allocation.

Overall, the new quotas were distributed among 89 institutions, covering the three major categories of banks, securities and fund management companies as well as insurers. Trust firms were the only category that did not receive additional quotas. The approved quota for individual institutions largely ranged between USD20 million and USD100 million.

Securities and fund management firms were the biggest beneficiaries of this round of expansion, cementing their dominant position in the industry. Fifty-three such institutions received a combined USD3.72 billion in additional quotas, accounting for 54.4 percent of the newly added total. As a result, the cumulative approved quota for this category reached USD101 billion, crossing the USD100 billion threshold for the first time, accounting for 55 percent of the market’s total.

Quota allocations for other categories were also clearly defined. Banks and insurers received new QDII quotas of USD1.76 billion and USD1.36 billion, respectively, bringing their cumulative approved quotas to USD31 billion and USD42 billion and accounting for 17 percent and 23 percent of the total market quota. Meanwhile, trust firms have a combined approved quota of USD9 billion, making up less than 5 percent, highlighting an increasingly pronounced polarization among institutional participants.

Expanding Pool

As in previous rounds, the expansion of quotas was accompanied by an enlargement of the pool of QDII participants, according to Yicai research. Three institutions, namely Xinyuan Asset Management, East West Bank (China) and China CITIC Bank International, were granted QDII quotas for the first time, each receiving USD100 million.

The number of domestic mutual fund companies with QDII investment quotas has now increased to 57, while the mutual fund sector's cumulative approved quota has reached USD83.59 billion. Among them, nine companies have cumulative approved QDII quotas of more than USD2.5 billion. Their combined approved quota stands at USD41.8 billion, accounting for more than half of the sector's total and reflecting the significant concentration of resources among top players.

E Fund Management holds the largest quota among mutual fund companies. Since receiving its first USD1 billion quota in October 2009, the Guangzhou-based firm has undergone 20 quota increases to reach a total of USD7.96 billion. It currently has the largest quota of any single institution in the entire market. Ping An Insurance (Group) Company of China ranks second with USD7.86 billion.

In recent years, driven by the increasing appeal of overseas assets and growing demand for global asset allocation and risk diversification, QDII funds have become more attractive to investors. Wind data shows that the total size of QDII funds surpassed the CNY1 trillion (USD149 billion) mark for the first time in January this year with total assets under management reaching CNY1.07 trillion as of the end of July.

Quota Constraints

However, as demand surges, the mismatch between strong demand and insufficient quota supply has made purchase restrictions a common feature of the QDII market. For some popular products, daily subscription limits have even been slashed to as little as CNY10 (USD1.50), representing a level of "extreme control.”

As of Aug. 28, there were 333 QDII products in the market, excluding products still within their lock-up periods and products that have not yet been launched, according to Wind data. Of these, 34 are completely closed to new investors, while 124 have imposed significant purchase restrictions. Together, these two groups account for nearly half of all QDII products in the market.

As quotas are loosened, investors should also be alert to the potential risk of premiums on exchange-traded QDII funds returning toward their underlying values, industry insiders said.

If fund premiums return toward normal levels, investors who previously bought QDII funds on the exchange at high premiums could suffer losses due to the narrowing of the premium, even if the funds' underlying assets have not depreciated, an insider at the marketing department of a large mutual fund company said.

Easing QDII quotas addresses the question of "whether investors can buy," but does not eliminate core investment risks such as volatility in overseas markets, the insider said. He advised investors to allocate assets rationally based on their own investment needs and avoid "buying simply for the sake of buying."

Editor: Kim Taylor