Banking & Finance

Loss leaders

QDII products have performed badly, but CITIC wants another chance

Kong Dan: CITIC Bank boss

QDII stands for Qualified Domestic Institutional Investor – a scheme that allows Chinese financial institutions to sell overseas securities and bonds to local investors. Following the release of performance data, many investors will be asking if ‘Quantifiable Decline In Investment’ might be a better moniker.

The problem is that QDII products have not been very good at providing returns for investors. More often than not, they’ve done the opposite.

As of mid-August, of the currently active 262 QDII products, only 108 had managed a positive return, according to Shanghai Puyi Investment Consulting. Out of the total, 100 were reporting a loss of at least 10%, while close to 50 had lost over 25%, reports the 21CN Business Herald.

These disappointing results are generally blamed on the timing of the scheme – most QDII products were released between 2007 and 2008, at the peak of the market. This means that many investors committed their money just before the financial crash. The State Administration of Foreign Exchange suspended the issuance of QDII quotas in May 2008 when heavy losses first became apparent, only lifting the ban last October when it judged the global downturn was passing. Then it granted another $7.4 billion in QDII quotas to nine fund houses.

The poorest performing products typify the disappointing trend. Take the worst performer – a crude oil index-linked product issued by Standard Chartered. Introduced as the commodity bubble burst, the product has booked a 45% loss, reports 21CN.

Another problem: the QDII scheme attracted a lot of high-net-worth customers, the sort that banks are keen to woo with offers of investment advice. Don’t risk all your funds on rollercoaster Chinese stocks, was the pitch. Opt for a little international sophistication.

That is making for some difficult conversations over lunch. “It is a challenge to retain the hearts of investors while at the same time persuading them to accept the losses,” one banking source admitted to the Economic Observer.

Some of the banks are asking clients for a second chance. That is what CITIC Bank is doing with a QDII Hong Kong China Fund that has resulted in an average 30% loss for its investors, says the Economic Observer.

The QDII product was issued by CITIC in September 2007, and it will reach maturity next week. But the bank is offering clients the opportunity to extend the terms of the deal, and give it more time to recover its losses. The investor still has an option every month to redeem the product. And under the extended terms, CITIC will charge only a custodian fee of 0.15%, foregoing redemption and management fees.

If it proves popular, CITIC might offer something similar for the three other QDII products that reach maturity this year. They also have unrealised losses of between 10% and 40%.

Extending the terms looks like a good gesture for banks keen to repair client relationships. But the next step will be to restore the reputation of QDII products in general, which are proving to be a much harder sell than when they were first released. Whether enthusiasm for overseas stocks will also suffer in the longer term remains to be seen. But for the moment, few are interested in buying into a product category with a loss-making history.


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