DEFINITION of Qualified Domestic Institutional Investor (QDII)

A qualified domestic institutional investor or QDII is an institutional investor that has met certain qualifications to invest in securities outside of its home country.

Popular QDII programs come from the People's Republic of China, where the main regulatory body, the China Securities Regulatory Commission, at times grants a limited avenue for institutional investors such as banks, funds and investment companies to invest in foreign-based securities.

A similar outbound investment initiative in China is the Qualified Domestic Limited Partnership (QLDP).

BREAKING DOWN Qualified Domestic Institutional Investor (QDII)

QDII programs are helpful in places where the capital markets are not yet fully open to all investors. In 2018, regulators began to make several updates to these programs. For example, an institution’s QDII quota will have a cap of 8 percent of fund assets. In addition, if an institution has used less than 70 percent of its existing allocation, it will not be eligible to apply for a new quota.

In April 2018, China’s State Administration of Foreign Exchange (SAFE) said that it was considering further reforms to its QDII program following its economic recovery. Notably, 24 firms received new QDII quotas of $8.33 billion. Of the group of 24,12 are existing QDII investors and the remaining ones are newly qualified.

Asset management firms received the majority of the new quota issuance. Insurance companies received $1.99 billion, securities firms $420 million, and trust companies received the rest.

Bank of America (BofA) Merrill Lynch believes more quotas will be granted.

Qualified Domestic Institutional Investor and the 2015 China Stock Market Crash

New QDII quotas have been on pause since the 2015 stock market crash in China, which led to major capital outflows. As noted above, SAFE has only recently begun to revisit the issuance of quotas.

Several factors contributed to the market downturn several years ago, including excessive margin loans from Chinese brokerages. This fueled a massive run-up in the market. A subsequent uptick in margin calls on borrowed positions led to a downward spiral of selling and increased volatility.

After two years, China has again begun to grant licenses to approximately twelve dozen global asset managers under the QLDP program (similar to QDII). These foreign managers were allowed to raise money in China for investment overseas during a six-month period. Firms included JPMorgan Chase, Standard Life Aberdeen, Manulife Financial, Allianz, BNP Paribas, AXA, and Robeco and Mirae Asset. The motion signaled strength in the Chinese economy and paved the way for the revival of QDII.