China is likely to broaden the investment scope for domestic institutional investors, or the QDII, to invest offshore with purchased foreign currencies.

The government is thinking of allowing insurers, using purchased foreign currencies, to invest in stocks other than fixed income products in the overseas market, according to Cao Deyun, section chief of the Fund Management Regulatory Department with China Insurance Regulatory Commission (CIRC).

"CIRC is in discussions with the central bank on the issue and will jointly formulate detailed rules." Cao said yesterday. But he did not give a specific date as to when the rules will come out.

Earlier on April 14, the central bank and the State Administration of Foreign Exchanges jointly released rules to allow banks, insurers and fund management companies to purchase foreign currencies to invest offshore.

The rules, which allow domestic money to seek global investment opportunities, signal the beginning of the long-awaited QDII scheme, which is believed to represent a big step forward for the Chinese Government to reform the nation's capital account and further integrate China's capital market into the global financial platform.

"But banks and insurers can only invest in fixed income products," the April 14 rules said.

However, according to Cao, this is likely to be revised, as CIRC and the central bank are in further discussions on whether insurers can purchase foreign currencies to invest in stocks, in addition to fixed income products such as deposits and bonds in the overseas market.

"Qualified insurers will invest in various financial products, including deposits, bonds, corporate bonds, MBS (mortgage backed securities), ABS (assets backed securities), and stocks." Cao said.

Meanwhile, officials also highlighted the need to contain risks when investing in overseas markets, which few domestic insurers are familiar with.

"As we broaden the investment scope, related risks will also occur," said Yuan Li, assistant chairman of CIRC. "Therefore we must make detailed rules before allowing insurers to broaden their investment scope."

Actually, last year insurers were allowed to invest in overseas stocks with their own foreign currencies and in August 2004 CIRC issued detailed rules to guide insurers' investments in overseas bonds and stocks with their own foreign currencies.

The investment loosening is particularly good news for the mainland's insurers, which are losing a growing share of the market to overseas competitors through underground agents. Ping An Insurance Company of China and China Life are said to have already started to consult foreign fund managers to forge their strategies for investing in overseas stock markets, according to Jing Ulrich, chairman of JP Morgan's China Equities.

Goldman Sachs yesterday predicted there would be US$6 billion QDII capitals flowing into the overseas stock market, mainly in the Hong Kong stock exchange, due to lower foreign exchange risks.

"We estimate initial incremental liquidity inflows will not exceed US$6 billion, but the potential would be enormous given China's huge foreign exchange reserves of US$870 billion." Thomas Deng, executive director of Goldman Sachs said yesterday.

QDII's future investment in domestic A shares as well as the offshore H shares in the Hong Kong Stock Exchange will help to enhance market efficiency by accelerating the valuation convergence between the domestic and offshore equity markets.

Those H-share companies trading at deep discounts to their A-share counterparts should see the valuation gap narrow further, said Goldman Sachs.

(China Daily April 27, 2006)