qualified domestic institutional investor (QDII) programme, which
allows both domestic and foreign institutions to invest in overseas
markets, has bowed to the inevitable and embraced the equity culture.

Announced last
year, the QDII scheme allows individuals, banks and corporates in China
to invest in overseas markets using foreign currency. QDII was welcomed
as partial lifting of China's long-standing restrictions on access to
hard currency and as a means to counter the growth in China's foreign
exchange reserves.

To allay investors' fears, foreign investments were initially limited to low-risk instruments like bonds.

attractiveness of the QDII scheme has, however, been hit by the
appreciation of the yuan, which has reduced the returns for
yuan-denominated investors when they repatriate profits made in
overseas markets.

biggest casualty so far has been the Bank of China which announced this
month it would scrap the nation's first overseas investment fund set up
under the QDII program. The fund was liquidated following a collapse in
net asset value due to a a large number of redemptions from individuals
spooked by the appreciating yuan, according to this Bloomberg story.

the problem, Chinese investors who played safe and invested in the
domestic equities markets have enjoyed phenomenal returns in the past

Clearly, China faces an uphill task encouraging domestic investors to be go overseas and so it has bowed to the inevitable and expanded the range of permitted QDII investments, thus increasing the risk profile.

funds can now invest in derivatives in the mainland and Hong Kong, so
allowing banks to hedge currency risks arising from the yuan's
appreciation. QDII participants can also now invest in HK-based equity

More on QDII in this earlier EngagingChina story.

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