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Chinese authorities are tightening restrictions on capital outflows by restricting access to funds that invest in offshore securities as the country grapples with a brutal market collapse.
About a third of Chinese funds investing in foreign securities under schemes that circumvent strict capital controls have been turned over to retail investors “to maintain stable operations and protect investors’ interests” announced in a stock exchange notice that it had suspended or restricted the sale of
The Beijing-based manager of a fund focused on U.S. stocks received an informal directive from the Shanghai Stock Exchange to reduce sales of such products to overseas markets after demand “went through the roof.” He said he received it.
Chinese authorities have repeatedly sought over the past year to halt a prolonged slide in domestic stocks, but the scarred sentiment has not improved, prompting many investors to seek higher yields elsewhere.
The soaring popularity of offshore funds among retail investors has raised regulators’ concerns about capital outflows. Last August, the Financial Times reported that China’s biggest fund companies were close to meeting government quota limits for offshore investments.
The government’s Qualified Domestic Institutional Investor Scheme will allow banks, securities firms and asset managers to circumvent China’s strict capital controls. Buying into funds offered through the QDII scheme is the only legal way for Chinese retail investors to invest in foreign stocks and bonds.
Rising investor demand has caused some funds to reach quotas, while others have been told by Chinese regulators to slow or even stop selling their funds.
According to public filings, 79 Chinese QDII funds have stopped selling to retail investors, and 53 have placed caps on sales. Together, these account for about 30% of all his QDII funds targeting overseas markets outside of Hong Kong. Funds also include funds managed by JPMorgan Asset Management and Manulife Investment Management.
JPMorgan did not respond to a request for comment, while Manulife declined to comment.
Separately, several Chinese securities companies that sell funds to retail investors through the QDII system said in public filings on Tuesday that the Shanghai Stock Exchange-led regulator said it would be a “return” for exchange-traded funds that invest in foreign stocks. It said it was cracking down on “abnormal transactions.”
Regulators specifically requested a halt to trading involving ETFs that seek to match the performance of the MSCI USA 50, Nasdaq 100 and Japan’s Nikkei 225 index, brokerages said.
Tightly controlled QDII allocations have increased competition for foreign investment, with these ETFs trading well above their net asset value. As of the end of 2023, the Chinese government’s QDII investment quota totaled $166 billion across 186 institutions, only a slight increase from 2021.
Ding Wenjie, global capital investment strategist at China Asset Management, said: “Surge in demand on the one hand and quota restrictions on the other – both of these factors contribute to the particularly challenging situation we are currently seeing for QDII funds. “It was a contributing factor,” he said.
Mr Ding said this month demand for funds linked to Japan’s Nikkei stock average had become “irrational” and were trading at a premium of up to 20% to asset value. Funds targeting the US and India were also popular, Ding said.
The China Securities Regulatory Commission and the Shanghai Stock Exchange did not respond to requests for comment.
In another move to support Chinese stocks, which have continued to fall sharply this month, authorities have told some institutional investors not to sell domestic stocks.
Since October, market regulators have issued private instructions known as “window guidance” to some investors, preventing them from selling stocks on certain days.
China’s benchmark CSI 300 index has fallen nearly 5% since the start of 2024, continuing to fall due to disappointment with government policy and persistent concerns about a slow economic recovery.
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