In my last post I mentioned that I expected to talk a fair amount more on QDII in the future. I didn't quite expect to get another announcement only a week later.
More news has come out of China about the QDII program, and it should translate into big profits for Chinastocks.
As you may remember, last month China took an important step towards opening its financial markets with a new ruling called the Qualified Domestic Institutional Investors Program (or QDII for short). Under this program, domestic banks in China were allowed to start investing in foreign stocks. (In the past, banks had always been limited to purchasing foreign bonds.)
This was good news for Chinese investors because it meant they would finally be able to go to their banks and buy professionally managed funds containing foreign-listed companies.
Still, the only major stock regulatory agency in the world that has signed an agreement with China's Banking Regulatory Commission is Hong Kong. That means new QDII funds will only be allowed to invest in Hong Kong-listed stocks. It's still uncertain as to whether or not other countries will sign up for the QDII. Until that happens, Chinese investors will still have limited access to international securities and demand for investment alternatives will continue to build.
But China took another step last week towards expanding its QDII program. Chinese securities regulators announced that they will now allow brokerage firms, fund managers and insurance companies (not just banks) to use foreign shares to set up new mutual funds for Chinese citizens.
At the moment, brokers, fund managers and insurance companies are limited to investing in Hong Kong stocks, but now Chinese investors will have even more fund options to choose from.
Though it will still take some time for banks, insurance companies and brokers to set up all of the back-end processes that will get these new funds to the public, the psychological impact of this new policy will be enough to push stocks higher in the coming months.
Experts believe that Chinese investors could buy as much as $100 billion in foreign funds once all of the systems are in place. It's hard to imagine, but this plan is actually designed to cool the Chinese markets and allow them to grow at a more reasonable pace. I don't think the new policy will have the desired effect, because there is still already enough momentum in the Chinese market to hold investors attention and keep them buying.
But, I do believe that those Chinese companies that are also listed in Hong Kong will benefit the most from this new twist to QDII. I expect most institutional investors to create funds with well-known Mainland Chinese companies listed in Hong Kong, some of my favorites are China Life (NYSE: LFC), China Mobile (NYSE: CHL) and Huaneng Power (NYSE: HNP).
I'll continue to keep an eye on the developing QDII situation in China, and I'll be sure to let you know if I hear of more exciting news that could benefit U.S. holders of Chinese stocks.