The document on qualified domestic institutional investors (QDIIs) investing overseas, released by China's securities watchdog last month, which becomes effective yesterday, allows domestic fund management and securities companies to follow commercial banks into the arena of overseas securities.

"We started preparing for QDII products nearly six months ago, "said Xu Xiaosong, vice general manager of China Southern Fund Management Co Ltd.

Xu's company has signed an agreement with US-based Mellon Financial Corp. to co-develop the first QDII product focusing on global funds and H-shares and expects to raise 800 million to US$1 billion.

A number of big securities companies in southern Shenzhen -- home to the nation's second biggest bourse -- have similar products, said a dealer.

"It's vital for fund companies to diversify their product structure," said Xu. "A number of investors are asking us to spread their investments globally," he added.

According to the document issued by the China Securities Regulatory Commission (CSRC), fund management companies with net assets of more than 200 million yuan (US$26 million) and more than two years of operational experience and securities companies with net assets of more than 800 million yuan and more than one year of investment management operations may apply for QDII investor status.

About 20 fund management companies meet the standards, said LiZhengqiang, vice director of the CSRC's fund department, adding that the CSRC is examining the composition, evaluation, and risk control measures associated with the QDII investment products.

Li Dongrong, vice director of the State Administration of Foreign Exchange (SAFE), said on Wednesday that his administration had approved a US$20.5 billion QDII quota -- US$14.8 billion for 19 banks, US$5.2 billion for four insurance companies and US$500 million for one fund management company.

The SAFE official said the China Insurance Regulatory Commission (CIRC) is now working with the CBRC and the SAFE to improve the 2004 regulations on insurance companies investing overseas.

Banks are leading the way. China Banking Regulatory Commission (CBRC) issued regulations requiring qualified banks to invest up to 50 percent of their overseas investment in stocks in May.

As the first QDII product which focuses on overseas securities, the Oriental Pearl, initiated by the Industrial and Commercial Bank of China on May 29, has raised 4.45 billion yuan by investing 50 percent of the funds into H-shares of state-owned enterprises including "red-chip" mainland companies listed in Hong Kong, and newly offered stocks.

Hong Kong is favored by most institutional investors on the Chinese mainland as they are more familiar with the market environment there and the risks are comparatively lower, said dealers.

A senior analyst with the Bank of China (Hong Kong) said the QDIIs would attract money into the Hong Kong stock market.

For investors, QDIIs may provide an alternative investment channel but they face risks of exchange rate fluctuations. "It's crucial for the QDII return to stay ahead of the value of the appreciating yuan, otherwise they will be less attractive than A shares," said Li Xianbin, a manager with Greatwall Fund Management Co.

China Southern Fund Management Co seems to have found a solution. It has spread its assets over different currencies to reduce the impact of forex fluctuations, said Xu.

The QDIIs will help reduce excessive liquidity and narrow the price gap between A shares and H shares, said Cheng Weiqing, vice president of CITIC Holdings.

"Domestic fund companies need to have a better understanding of overseas markets," said Yan Ji, a director of HSBC Jintrust Fund Management Co Ltd. "And investors must make rational judgments based on studies of a company's financial performance instead of chasing after price differences," he added.