The rising demand from Chinese investors for offshore investments has led foreign banks and fund managers to struggle with limited outbound-investing quotas, despite recent selloffs in U.S. and Japanese markets.

Firms utilizing China’s Qualified Domestic Institutional Investor (QDII) program are adopting creative strategies to manage the increasing appetite for overseas assets, as revealed by executives from a foreign bank, fund house, and wealth management units. The QDII program, which permits mainland Chinese investors to purchase foreign stocks, bonds, funds, and structured products, has seen a surge in interest, reflecting a broader lack of confidence in local assets.

As of the end of July, China had approved a total of $167 billion in QDII quotas across 189 institutions, with foreign firms receiving allocations ranging from $300 million to $4.7 billion. However, the actual usage of these quotas remains undisclosed.

Turnover on Monday of domestic A-shares reached its lowest level since May 2020, with only 496 billion yuan ($69 billion) in trades, underscoring the lackluster performance of local assets. In response, some firms are implementing measures to manage quota limitations, including reallocating quotas between branches to avoid hitting caps.

An executive from a U.S. fund house in China mentioned that in recent months, his company had to drop institutional clients to free up quotas for retail investors, who typically generate higher fees. Meanwhile, subscription caps are being used as a temporary solution until expanded quotas are available, although China’s foreign exchange regulator does not grant new quotas regularly.

The demand for offshore investments has grown as Chinese investors seek higher returns in the face of a sluggish local economy and prolonged property downturn. While a recent selloff in U.S. and Japanese stocks temporarily freed up some quotas, experts warn that these limits will quickly be reached again.

In a bid to circumvent quota constraints, some bank wealth units are introducing swap structures with their parent companies offshore, allowing them to continue serving clients despite the growing demand. For instance, one bank wealth unit reported that monthly new flows into offshore-investing products could reach 1 billion yuan.

Foreign firm executives, who spoke anonymously due to company policies, highlighted the challenges of meeting this surging demand. The rising pressure has led to face-to-face meetings between investors and bank branches as clients scramble to secure QDII quotas.

As investors continue to worry about the onshore market, the demand for QDII products remains strong, with many viewing them as essential for diversifying their portfolios. “The question is, after the selloff, whether investors still want to explore global instruments besides the onshore market,” said a foreign bank manager. “And the answer is clear now—QDII is a must when people worry about onshore.”

(Adapted from Invesitng.com)

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