Analysts divided over China’s market bubble, QDII outflows

Analysts divided over China’s market bubble, QDII outflows

Mumbai: Even as the debate on whether a bubble is building up in the Chinese equity markets hots up, analysts in Asia Pacific region are divided in their views about potential large capital outflow from China through qualified domestic institutional investors (QDII) route to other parts of the world including India.

“More than $100 billion (Rs3.93 trillion) could flow through QDII route from China to other markets in the next 12 months," predicts Adrain Mowat, chief Asian equity strategist at JPMorgan Chase & Co. “A significant part could come to India," he said, adding that there is huge demand for the QDII products in China.

JP Morgan Asset Management and Shanghai International Trust and Investment Corp. (SITICO) have together floated China International Fund Management, a fund that will invest in markets outside China.

QDII is a scheme approved by the foreign exchange control system in China under which domestic institutional investors can invest in foreign equity markets.

It is opposite to the qualified foreign institutional investor (QFII) scheme in China (similar to foreign institutional investor (FII) in India).

Tushar Poddar, economist and vice-president, Asia Economic Research at Goldman Sachs Group Inc., also says that here is a growing interest among Brazil, Russia, India and China (BRIC) nations about each other’s capital markets.

“The demand for each other’s equities among BRIC nations will be purely motivated by diversification to adjust risk," he says. “Such investments will not be for absolute returns."

However, Chinese analysts do not expect large capital outflows to markets other than Hong Kong.

“The QDII scheme was designed to enable Chinese investors to put their money in Hong Kong equity market," says Mandy Chan, who manages Chinese portfolio for ABN Amro Asset Management (Asia) Ltd. Chan says such funds will for the most part deploy money in Hong Kong. The QDII scheme was initially proposed by the Hong Kong government to attract Chinese capital.

“Half the money that is raised through the QDII route is already invested in Hong Kong," says Tony Tong, an analyst with Everbright Securities Co. Ltd, a leading equity brokerage in mainland China. “More money through this route (QDII) will flow into Hong Kong if there is a correction in its equity markets."

Kitty Chan, a fund manager at Cash Asset Management Ltd in Hong Kong explains this divide among analysts.

“There is a serious difference in the point of view of insiders and outsiders on the Chinese market," Chan says.