What Is a 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 their home country. Institutional investors can be organizations or groups of investors that have a significant amount of money available to invest. QDII programs enable large domestic investors to invest in securities in foreign markets. Examples of institutional investors that might seek to become a QDII include insurance companies, banks, funds, and investment companies.

Popular QDII programs come from the People's Republic of China, where the main regulatory body, the China Securities Regulatory Commission (CSRC), at times grants a limited avenue for institutional investors to invest in foreign-based securities. A similar outbound investment initiative in China is the Qualified Domestic Limited Partnership (QDLP).

Key Takeaways

  • A qualified domestic institutional investor (QDII) is an institutional investor that meets qualifications to invest in securities in foreign markets.
  • QDII programs started in China in 2006 and allow five types of Chinese entities to invest abroad: insurance companies, banks, trust companies, funds, and securities firms.
  • Entities that want to participate in the QDII program must first receive approval from China's State Administration of Foreign Exchange (SAFE), which is also responsible for establishing the investment quota amount allowed each participant.
  • Once approved, entities are allowed to make investments in the overseas markets for both themselves or on behalf of retail clients.
  • Firms can make investments in equities, fixed income, and derivatives in specified overseas markets.

Understanding Qualified Domestic Institutional Investor (QDII)

QDII programs are helpful in places where the capital markets are not yet fully open to all investors. Introduced in April 2006, China's QDII programs permit five types of Chinese entities to invest abroad: insurance companies, banks, trust companies, funds, and securities firms.

Entities must apply and receive approval for a license before they are allowed to make investments in the overseas markets for both themselves or on behalf of retail clients. Once approved, they can make investments in fixed income, equities, and derivatives in specified overseas markets. China's State Administration of Foreign Exchange (SAFE) is responsible for approving participants to enter the QDII program and for approving the investment quota amount allowed each participant.

The 2015 China Stock Market Crash

SAFE paused the QDII quotas after the 2015 stock market crash in China, which led to major capital outflows. Several factors contributed to the market downturn, 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 began to grant licenses to global asset managers under the Qualified Domestic Limited Partnership (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.

Revised Requirements for Qualified Domestic Institutional Investor (QDII)

In 2018, Chinese regulators began to make several updates to these programs. For example, an institution’s QDII quota has a cap of 8% of its fund assets, excluding money market funds. In addition, if an institution has used less than 70% of its existing allocation, it will not be eligible to apply for a new quota.

In April 2018, SAFE said that it was considering further reforms to its QDII program following its economic recovery. Notably, 24 firms received new QDII quotas of $8.34 billion. Of the group of 24 firms, 12 are existing QDII investors, and the remaining ones are newly qualified.

The move brought total outstanding QDII quotas to over $98.3 billion. Chinese President Xi Jinping said he would continue to open up China's economy to other outbound investment programs as financial markets have stabilized and regulators are less concerned about capital flight.

Qualified Foreign Institutional Investors (QFII)

Similar to the QDII program is the Qualified Foreign Institutional Investor (QFII) program. QFII permits certain licensed international investors access to mainland China's stock exchanges to buy and sell stocks. Prior to 2002, investors from foreign nations were prevented from buying and selling stocks on Chinese exchanges. The QFII program lifted these tight capital controls and gave some foreign institutional investors the authorization to trade on the Shanghai and Shenzhen exchanges.