Mainland Chinese banks allowed to create U.S. investment products

The China Banking Regulatory Commission (CBRC) announced yesterday that it had reached an agreement with the U.S. Securities and Exchange Commission to expand its Qualified Domestic Institutional Investor (QDII) program to cover the U.S. The program allows mainland Chinese banks to create investment products for its customers that can invest in U.S. shares. It does not cover individual investors directly investing in the U.S. market. The QDII program already encompasses agreements to allow investments in Hong Kong, Japan, the U.K. and Singapore. According to the Wall Street Journal, it has been estimated that the CBRC has already approved US$50 billion worth of QDII quotas, although at the end of last year, only about US$7 billion had been invested.

The program helps banks by creating another source of profit. Over time, if the program becomes more sizable, it could help China to relieve upward pressure on the Renminbi, as the program provides an additional avenue for Chinese to diversify away from their home currency. However, given the state of the U.S. economy, worries about the stability of the country’s financial system, and expectations that the U.S. dollar will continue to weaken against the Renminbi, Chinese investors may not be that enthusiastic about buying funds with large U.S. stock exposure. As a result, the program is unlikely to be a driver for U.S. share prices in the near-term.