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18 December 2007

China gives the green light for banks to invest in British funds

China loosened its controls on overseas investments yesterday by opening the door to its banks to invest in British stocks and mutual funds. Britain becomes only the second destination after Hong Kong in which the banks can invest their clients’ money.


The reforms are expected to boost investment in London’s biggest companies as well as bringing a welcome injection of liquidity into global markets. However, analysts said yesterday that the change would not happen “overnight”.


China’s Qualified Domestic Institutional Investor programme (QDII) will allow banks to direct some of their funds to Britain. They may only invest in countries whose regulators have signed a memorandum of understanding with the China Banking Regulatory Commission.


The move is the latest development in a scheme that was launched by China to encourage limited capital flows out of the country and to relieve upward pressure on the yuan. Banks will soon receive permission to invest QDII funds in American stocks and mutual funds after an agreement between US and Chinese officials in talks in Beijing last week.


Chinese brokers and mutual funds with a total QDII quota of nearly $40 billion (£19.8 billion) are already allowed to invest their customers’ funds in stocks in 33 countries. While the relaxation is unlikely to result in a sudden rush of money into London, fund managers yesterday said the change would benefit FTSE 100 companies and global markets in the long term.


Brian Dennehy, a fund manager at Dennehy Weller, said: “This is a process rather than an event. On balance it will be positive as it is another serious source of liquidity to global markets at a time when this is a key measure in improving the UK economy.” He added: “London is recognised as a place for Chinese banks to get global exposure so FTSE 100 companies in particular will benefit, although I can’t see this having a great impact for small and mid-cap stocks unless some great value is recognised there.”


China’s domestic investors have traditionally shown a preference for markets closer to home, such as Hong Kong, with which they are more familiar and where a number of Chinese companies are listed. In addition, the banks’ clients must invest in the funds a minimum of 300,000 yuan (£20,000) - an enormous sum for the majority of Chinese.


That threshold has been imposed by the authorities to protect China’s less well-off would-be investors from rushing overseas to try to make money. In any case, the initial response to QDII has been muted, with investors preferring to keep their money at home in the booming stock market. That has prompted regulators to loosen the rules.


Authorities estimate that $28.6 billion of QDII had been invested overseas by the end of October. JPMorgan estimates about $90 billion of QDII funds will come from China by the end of 2008.


The road to overseas investment

China introduced the QDII last April so that individual investors may invest overseas indirectly through banks, brokerages, insurers and fund managers

China’s Government is loosening restrictions on overseas investment to counter inflows from a record trade surplus that has driven up local stock and property prices

— Chinese brokers and mutual funds, with a total QDII quota of nearly $40 billion (£19.8 billion) are already allowed to invest their customers’ funds in stocks in 33 countries

— Commercial banks can only buy in Hong Kong and soon in the UK

— Chinese investors have shown huge enthusiasm in the scheme in Hong Kong

China is advising QDII fund managers to invest in “mature” foreign markets outside Hong Kong to spread risk

© Graham Bishop

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