Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):
HEARD IN ASIA: Expected Flood of Chinese Funds Flowing Offshore May Be a Trickle
Summary: The Chinese government announced plans in April to ease its strict foreign-exchange rules in order to allow its citizens and companies to invest offshore. It was thought this would result in a huge rush of funds among the estimated $4 trillion in savings accounts out of China and especially boost mainland Chinese firms listed on the neighboring Hong Kong exchange. This hasn't happened and isn't expected to produce more than a trickle of an outflow because the long-await Qualified Domestic Institutional Investment, or QDII, system is not only both cumbersome and costly but currently limits individual investors to fixed-interest investments like bonds and not equities. Only selected clients will be able to invest in equity funds through asset-management companies. HSBC analyst Zhi Ming Zhang said in a research report last month that QDII's impact on global bond and equity markets will be "virtually negligible." It's not all bad news regarding QDII however, because analysts understand that its influence could grow with time. Morgan Stanley analyst Jerry Lou argued that there could be upside for Hong Kong-listed firms that are under-represented on mainland bourses. For now though, QDII also requires that investors be given full protection against currency risks, further adding to fund expenses and representing a serious challenge to investment funds since no yuan hedging tools exist to on products with long maturities.
Comment on related stocks/ETFs: This is a rather disappointing development for investors in Chinese stocks, particularly those listed outside of mainland China that were expecting to receive a boost in share prices. There are in fact a number of forces at play here including China's swelling foreign-exchange reserves and speculation Beijing will allow the yuan to appreciate further, which is in effect keeping more yuan parked for the moment. Overall QDII should be view as positive as a step in the right direction. Professor Jizhou Wang of Capital University of Economics & Business in Beijing, argues QDII "is more meaningful in political terms than in economic ones" because it is a sign China is ready to start draining its vast foreign-exchange reserves. China Eastern Airlines Corp (NYSE:CEA) is one Chinese firm traded in the U.S. mentioned in the article as a potential large beneficiary of QDII since its Hong Kong shares trade more cheaply than the separate class of its shares listed in Shanghai, thus representing an arbitrage opportunity.