Researching On China's QDⅡ Overseas Investment Of Risk Management

QDII is the English initial for "Qualified Domestic Institutional Investor" which can help the domestic investors invest in overseas capital markets, just like QFII. QDII was proposed by Hong Kong government in 2001.The aim was to introduce domestic capital into Hong Kong securities market and promote the prosperity of Hong Kong's financial market. In recent years, as China's accelerated economic growth, foreign exchange reserve of China has increased dramatically. On April 13,2006,the People's Bank of China had issued "the People's Bank of China pronouncement (2006)5th,which stipulated the investment direction of QDII system and the operation methods of domestic bank acting as an agent for finance overseas. In this context, the QDII is established. It can provide a diversified international portfolio and better risk-return opportunities. But, from the annual report of QDII products, it is even negative growth in net worth. One of the factors is Sub-prime mortgage crisis. In addition, the RMB exchange rate appreciation, management inexperience and the risk awareness are other factors which caused the poor performance of QDII products. Investors can diversify risk and seek secured investment income overseas, at the same time, they have to face more and more complex risks.Further integration in the financial markets, investors may be faced with more investment choices. Especially, in recent years, the rise of emerging markets make the international asset allocation more attractive. So, many scholars made deep research on this subject, and evidence shows that the international asset allocation can improve portfolio returns and reduce risk significantly.This paper focuses on China's QDII market risk of overseas investment. In qualitative analysis, market risk, credit risk, legal and regulatory risk and country risk are main risks in QDII overseas investment. Market risk includes the exchange rate risk, asset price risk and interest rate risk. This paper proposed that we need suitable quantitative tools to measure the risk exposures and their management methods. International portfolio investment relates to cross-border capital flows and currency exchange, it's earnings would be bound to exchange rate fluctuations, so that there is exchange rate risk in cross-border investment. In this paper, it shows that the domestic investors can get the real rate of return in 5 kinds of hypothetical situations with the Theory of Interest Rate Parity. It is shown that currency appreciation would reduce or even completely offset the benefits of overseas portfolio investment, currency devaluation can improve the real rate of return. We can manage exchange rate risk with financial derivatives. Another main risk is asset price risk. If investment is made on a particular market, it is difficult to diversify risk. So we can diversify risk and enhance rate of return of investment portfolio by using the Theory International Asset Allocation. Because of the more and more complex risks, we need to establish the internal control mechanism and strengthen the external control mechanism to ensure and protect the domestic investors'interests.Through the research of the thesis, the author gets the following main innovative viewpoints:Firstly, this paper answers the question of theoretical foundation of QDII. QDII is the initial for "Qualified Domestic Institutional Investor", which can diversify risk and improve the rate of return. In the paper, the theoretical foundation of QDII are the Portfolio Theory and International Investment Theory.Secondly, the paper analyzes the main risks faced by QDII overseas investment. Because of the complicated and, changeful overseas investment environment, the investors have to face more and more complex risks. According to "The New Basel Capital Accord", the main risks of QDII are market risk, credit risk, legal and regulatory risk, and country risk. The most important is the exchange rate risk and asset price risk which are included in market risk.Thirdly, the return of international portfolio investment is subject to the exchange rate risk due to the multi-national capital flow and currency exchange. The paper demonstrates the influences the exchange rate fluctuations have on the returns of overseas securities investments under five hypothetical scenarios.Fourthly, the paper calculates the VaR of stocks in mainland China, Hong Kong, Emerging Market and Developed financial market using VaR historical simulation method. The result indicates that the price risk in mainland China is the biggest, while the market risk in developed countries is the smallest. It is concluded that we could gain better returns and diversify risks by allocating the QDII overseas stock investment fund globally.Fifthly, the establishment of the internal and external control mechanism of QDII overseas investment risk management was suggested. For the QDII overseas investment, it is not only necessary to enhance the external monitoring system, but also crucial to establish an effective internal control mechanism. The paper analyzed the basic principles and frameworks of internal control.In recent years, there are many papers and publications on QDII. The contribution of this paper is:It calculates the rate of return and VaR of mainland China, Hong Kong, Developed markets as well as emerging markets, which discloses the reason why QDII failed. Besides, the paper also classify the risks faced by QDII overseas investment by referring to Basel Accord. While in the previous research, the external monitoring system of QDII overseas investment was given much more attention, this paper focuses on the establishment of internal monitoring system and the enhancement of external monitoring system.