China works to stem the money outflow by freezing the QDLP investment program

Written by Qinwen Wang || February 29 2016

For many years, the Chinese government has encouraged cross-border investment, both to support the domestic stock markets, but to also give domestic investors more choice in investment options and products. One such program was the QDLP program or Qualified Domestic Limited Partner scheme. Due to the renewed focus on controlling outflows, this program is now stopped. 

The QDLP program was originally designed to allow foreign asset managers in Shanghai’s free trade zone to sell overseas investment products directly to wealthy Chinese clients. The program is somewhat similar to the QDII program or Qualified Domestic Institutional Investor Program, which allowed domestic firms to create fund products based on overseas assets and sell them to domestic investors. The successor to the QDII program was the QDII 2 program, which had been delayed. Now it seems that both the QDLP and QDII2 will be suspended until the government feels more comfortable about cross-border flows.

When announced last year, the QDLP scheme was considered as a breakthrough and a diversification for traditional asset managers looking for direct access to mainland China’s wealth. It was also seen as a strong competitor to cross-border investment channels based in Hong Kong. But China’s capital outflow has no secret to others. Wealthy Chinese have been transferring their fortune to the Western countries for property purchase in exchange for permanent citizenship. Capital outflows lead to a weaker currency, which especially concerns the hordes of Chinese companies that borrowed debt in foreign currencies over the past few years and now have to pay it back with a weaker yuan.

Last year, China's foreign acquisitions totalled $116 billion, with ChemChina's purchase of Pirelli topping the list. This is against $700 billion of currency outflows over the same period. Government data shows outbound investments are close to overtaking for the first time foreign direct investment into China, which stood at $126.5 billion at end-2015.

With all of the outflow pressure, there is little doubt as to why the government is further restricting the flows.