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What are the Challenges and Problems Facing China's Outward Portfolio Investment: Evidence from the Qualified Domestic Institutional Investor Scheme

Author

Listed:
  • Aidan Yao

    (Hong Kong Monetary Authority)

  • Honglin Wang

    (Hong Kong Institute for Monetary Research)

Abstract

Since their inception in late 2007, the Qualified Domestic Institutional Investor (QDII) funds, which help Chinese investors to invest in foreign capital markets, have experienced significant portfolio losses and persistent fund outflows. While these losses are large in absolute terms, QDII funds, on average, performed better than Chinese A-share funds, but slightly worse than a group of foreign mutual funds. Our study focuses on the QDII industry, and asks three interrelated questions: 1) why have there been large fund outflows from the industry? 2) What explains QDII funds' poor performance? And 3) why have QDII funds been so heavily exposed to the Hong Kong market? Our empirical analysis shows that the persistent capital outflows were primarily a result of disappointing fund performance. This poor performance can, in turn, be explained by the deficiency of knowledge required of QDII fund managers to successfully invest in foreign capital markets and manage global portfolios. Finally, our study goes some way to explain the phenomenon of QDII funds' large asset allocation in the Hong Kong market. This 'Hong Kong bias' is shown to be consistent with the well-documented 'home bias' behaviour in cross-border portfolio investment, but is greatly exacerbated by the lack of global investing experience of QDII managers.

Suggested Citation

  • Aidan Yao & Honglin Wang, 2012. "What are the Challenges and Problems Facing China's Outward Portfolio Investment: Evidence from the Qualified Domestic Institutional Investor Scheme," Working Papers 312012, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:312012
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    References listed on IDEAS

    as
    1. Dong He & Lillian Cheung & Wenlang Zhang & Tommy Wu, 2012. "How would Capital Account Liberalization Affect China's Capital Flows and the Renminbi Real Exchange Rates?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 20(6), pages 29-54, November.
    2. Eichberger, Jurgen & Grant, Simon & King, Stephen P., 1999. "On relative performance contracts and fund manager's incentives," European Economic Review, Elsevier, vol. 43(1), pages 135-161, January.
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    4. He, Dong & Wang, Honglin, 2012. "Dual-track interest rates and the conduct of monetary policy in China," China Economic Review, Elsevier, vol. 23(4), pages 928-947.
    5. Lillian Cheung & Kevin Chow & Jian Chang & Unias Li, 2006. "Outward Portfolio Investment From Mainland China: How Much Do We Expect And How Large a Share Can Hong Kong Expect to Capture?," Working Papers 0613, Hong Kong Monetary Authority.
    6. Joseph Chen & Harrison Hong & Ming Huang & Jeffrey D. Kubik, 2004. "Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization," American Economic Review, American Economic Association, vol. 94(5), pages 1276-1302, December.
    7. Fred Hu, 2005. "Capital Flows, Overheating, And The Nominal Exchange Rate Regime In China," Cato Journal, Cato Journal, Cato Institute, vol. 25(2), pages 357-366, Spring/Su.
    8. Kalok Chan & Vicentiu Covrig & Lilian Ng, 2005. "What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide," Journal of Finance, American Finance Association, vol. 60(3), pages 1495-1534, June.
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    Cited by:

    1. Tao Cai & Vinh Q. T. Dang & Jennifer T. Lai, 2016. "China's Capital and ‘Hot’ Money Flows: An Empirical Investigation," Pacific Economic Review, Wiley Blackwell, vol. 21(3), pages 276-294, August.

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    More about this item

    Keywords

    China Economy; Capital Account Liberalisation; Outward Portfolio Investment; QDII;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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