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

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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

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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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