QDII:  Liberalizing China's Foreign Exchange and Securities Market

August 11, 2006

Totaling U.S. $875.1 billion, China currently has one of the largest foreign exchange reserves in the world.  Coupled with the trade imbalance, the Chinese government is under great pressure to re-evaluate its currency and implement foreign exchange reforms.  Chief among its concerns is how to channel its massive foreign exchange reserves into the international capital market.  To that end, China issued People’s Bank of China Decree No. 5 (“PBOC Decree No. 5") on April 13, 2006, which established a Qualified Domestic Institutional Investors regime (“QDII”). 

By permitting qualified commercial banks, securities institutions, and insurance companies to make limited offshore investments, QDII provides new investment options for China’s household bank savings deposits (totaling Renminbi 16 trillion yuan) and its National Social Security Fund (totaling over Renminbi 200 billion yuan).  When combined with China’s 2002 Qualified Foreign Institutional Investor regime (“QFII”), which allows foreign capital to invest in China’s A-share stock market and bonds, QDII establishes a two-way channel for capital to flow in and out of China via institutional investors.

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