**Abstract:** In recent years, the growth of QDII funds has been rapid, with restrictions on purchases imposed multiple times.

When the return on domestic financial assets declines, overseas deployment is an important path for expansion.

In the past, due to China's rapid economic growth, it was possible to achieve high asset returns without global deployment.

However, China is currently in a low-interest-rate cycle, with a slowdown in economic growth and a decrease in domestic asset returns, leading to a significant increase in the demand for overseas asset allocation.

The main purpose of the QDII system is to allow domestic financial entities to invest in the international market, achieving global asset allocation and risk diversification.

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However, this report finds that QDII funds actually invest more in stocks and bonds of Chinese enterprises in the Hong Kong and U.S. markets, and have not fully achieved global deployment.

By the end of 2023, among the passive QDII fund scale, 47.15% tracked Hong Kong market indices, and 23.16% tracked indices related to Chinese concept stocks; in the active QDII fund holdings, Chinese concept stocks accounted for 58.03% of stock investments; in QDII fund bond investments, 62.71% were invested in U.S. Treasury bonds, and 18.36% were invested in overseas bonds of Chinese enterprises.

Since the operation cycle of Chinese enterprises is closely related to the domestic economic and financial environment, such investments are difficult to truly achieve risk diversification.

This report conducted in-depth interviews and questionnaire surveys with experts in the overseas investment business of fund companies, and found that the reasons why public funds find it difficult to achieve global deployment include high research and investment costs, information asymmetry, high talent costs, insufficient QDII quotas, customer preference for domestic assets, geopolitical risks, high costs of transnational lawsuits, exchange rate fluctuation risks, and problems with the agency of fund companies.

In response, this report makes the following policy recommendations: 1) Encourage the development of QDII-ETF and QDII-FOF products; 2) Encourage the inclusion of more multinational companies in the Hong Kong Stock Connect; 3) Improve the regulatory details of cross-border TRS and other derivatives; 4) Optimize the incentive mechanism for fund managers; 5) Encourage the establishment of overseas subsidiaries and strengthen overseas cooperation.

**The Necessity of Global Deployment:** The current asset price cycle: In 2023, the stock markets of many countries performed well, and the bond markets of many developed economies also enjoyed relatively high yields.

In the past, due to China's rapid economic growth, it was possible to achieve high asset returns without global deployment.

However, China is currently in a low-interest-rate cycle, with a slowdown in economic growth and a decrease in domestic asset returns, necessitating an increase in overseas asset allocation.

In addition, looking at the stock index returns and volatility over the past decade, the stock index returns of several markets are higher than those of mainland China, and the volatility is lower than that of mainland China.

Global deployment helps to increase the returns of the investment portfolio and reduce the volatility of the investment portfolio.

Classical portfolio theory: Affected by the differences in the division of labor in the global industrial chain and the development stages of regional economies, there are differences in the asset price cycles of various countries, and there is a certain time difference in the fluctuation cycles of stock market indices of major economies.

The correlation between A-shares and the stock markets of most economies is weak.

In contrast, the correlation between A-shares and Chinese concept Hong Kong stocks is 0.96, and the correlation between A-shares and Chinese concept U.S. stocks is 0.78, which is significantly higher than the correlation between A-shares and the stocks of other regions.

Modern portfolio theory points out that investors should hold a diversified asset portfolio to diversify risks[1].

Allocating Chinese concept stocks is difficult to play a role in diversifying risks, and public funds should pay more attention to assets with a lower correlation with A-shares.

Allocating overseas assets is beneficial to reduce the correlation of assets in the investment portfolio, thereby hedging the specific risks of countries and industries, and improving the risk resistance to fluctuations in a single economy.

The phenomenon of local preference (Home bias[2]) of public funds is very prominent.

Morningstar data shows that the proportion of Chinese open-end funds invested in the domestic market is far higher than China's proportion in the global stock market, and the difference between the two proportions is far from that of developed economies.

Academic research shows that local preference may lead to a decline in the level of investment portfolio returns, low efficiency of investment portfolios[3], and an increase in financial risks[4].

**Current Status of Public Fund Foreign Investment:** In recent years, with the continuous improvement of the level of opening up of China's capital market, the demand for overseas asset allocation by domestic entities has been increasing.

The gradual maturity of foreign investment channels such as QDII (Qualified Domestic Institutional Investors), Hong Kong Stock Connect, "Southbound" bond connection, and cross-border TRS (Total Return Swap) has allowed more domestic financial institutions to go global and participate in the competition and cooperation in the international capital market.

▶ QDII Funds: As of December 2023, the cumulative approved QDII quota for fund and securities companies was 90.55 billion U.S. dollars, equivalent to about 644.752 billion yuan, and the proportion of QDII fund scale to quota has been increasing year by year (Figure 4).

In recent years, the growth of QDII funds has been rapid, with a 26.58% increase in the number of QDII funds in 2023 compared to the previous year, and a 27.60% increase in scale.

By the end of 2023, 78.15% of QDII funds were passive index-tracking funds, and only 21.85% were active funds.

▶ Hong Kong Stock Connect: By the end of 2023, among the 8,319 funds that can invest in stocks, a total of 2,095 held Hong Kong stocks, with a market value of 321.061 billion yuan, accounting for 5.86% of the stock investments of these 8,319 funds.

Among them, the active funds that can invest in stocks held a market value of 271.812 billion yuan in Hong Kong stocks, accounting for 7.54% of their stock investments.

▶ "Southbound" Bond Connection: In September 2021, the "Notice on Carrying Out Southbound Cooperation of the Interconnection between the Mainland and Hong Kong Bond Markets" was issued, and the "Southbound" bond connection officially went online.

As of February 2024, the number of custodies was 734, with a total scale of 398.27 billion yuan.

However, Wind data shows that in the top ten major bonds of bond funds, hybrid funds, and FOF funds, there are only bonds issued in the domestic market, and there are no "Southbound" bonds of the Hong Kong Stock Exchange, and few public funds invest in overseas bonds through the "Southbound" bond connection.

▶ Cross-border TRS: Although there is no public channel to calculate the scale of overseas assets invested through cross-border TRS, many insiders say that attracted by high returns and low exchange rate sensitivity, this is currently one of the important ways for asset management institutions, especially private equity funds, to participate in the overseas market[5].

Currently, there are 10 securities companies with cross-border business pilot qualifications, including CITIC Securities, Haitong Securities, Guotai Junan, Huatai Securities, China Merchants Securities, GF Securities, CICC, CITIC Securities, China Galaxy, and Shenwan Hongyuan Securities.

According to a report by Caixin in March 2024, several securities companies with cross-border TRS qualifications have been asked to prohibit new cross-border TRS investments as of the investment balance at the end of January 2024.

▶ Holding A-share companies with overseas business: In addition to QDII and Hong Kong Stock Connect, public funds can also indirectly achieve overseas investment by holding A-share companies with overseas business development, and obtain returns from overseas economic growth.

19.15% of A-share companies held by public funds (excluding QDII funds) disclosed overseas business income (only companies that have disclosed the 2023 annual report as of April 12, 2024 are counted).

According to the weighted proportion of the market value of a single stock held by public funds to the total market value of A-shares held by public funds, the proportion of overseas business income of A-share companies held by public funds to the main business income reached 8.33%.

It can be roughly estimated that about 431.444 billion yuan of public fund investment has obtained overseas business income through A-share companies.

**Distribution of Overseas Investment Targets:** ▶ Asset Category: Mainly stocks: For QDII funds, stock funds are the main type.

Wind data shows that as of the end of 2023, the number of stock, hybrid, bond, and other types of QDII funds was 183, 55, 25, and 18, respectively, with scale proportions of 84.89%, 9.97%, 4.42%, and 0.73%, respectively.

Other types of QDII funds mainly invest in alternative assets such as gold, crude oil, precious metals, and overseas real estate trusts (REITs), with a small proportion of scale and quantity.

In QDII funds other than ETF funds, stocks, bonds, funds, and cash accounted for 80.75%, 4.87%, 6.82%, and 5.92% of total assets, respectively.

In terms of interconnectivity, public funds mainly invest in the Hong Kong stock market through the "Hong Kong Stock Connect", and many funds hold "Hong Kong Stock Connect" targets, while almost no public funds invest in the overseas bond market through the "Southbound" bond connection, so the main investment targets of interconnectivity are stock assets.

In addition, the overseas business development of A-share companies is also a stock investment for public funds.

Therefore, the asset category of public funds' foreign investment is mainly stocks.

▶ Stock Region: Mainly Hong Kong and U.S. markets, with Chinese concept stocks accounting for more than half: QDII: Wind data shows that QDII funds are mainly invested in the Hong Kong and U.S. markets, with a small part invested in emerging markets such as Vietnam and India.

As of the end of 2023, the top 3 Hong Kong stocks held by active QDII funds were Tencent, Alibaba, and Hong Kong Exchanges, and the top 3 U.S. stocks were Microsoft, Pinduoduo, and Nvidia.

Chinese concept stocks (companies with office addresses in China) accounted for 58.03% of the stock investments of active QDII funds.

In the Hong Kong stock investment of active QDII funds, 87.63% were Chinese concept stocks; in the U.S. stock investment of active QDII funds, 19.28% were Chinese concept stocks.

However, the market value of Chinese concept stocks only accounts for 78.43% of the Hong Kong stock market value and only 2.30% of the U.S. stock market value.

Overall, Chinese concept stocks have a relatively high proportion in the stock investments of QDII funds.Here is the translation of the provided text into English: **Hong Kong Stock Connect:** Publicly offered funds (excluding QDII funds) hold Hong Kong Stock Connect companies with 85.49% of their office addresses in Mainland China, while companies with office addresses in Hong Kong account for only 13.58%, and those in other countries only 0.93%.

Companies with more office addresses in Hong Kong or other countries still concentrate their main business in Mainland China.

The funds publicly offered through the Hong Kong Stock Connect are still mainly invested in businesses in China.

**Bonds:** U.S. Treasury bonds have the highest proportion, and Chinese overseas bonds are favored.

By the end of 2023, a total of 59 QDII funds invested in bonds, with a bond investment amount of approximately 18.248 billion yuan.

Among them, the bond investment market value of bond funds, hybrid funds, and equity funds is 16.882 billion yuan, 688 million yuan, and 678 million yuan, respectively.

According to Wind's detailed data on QDII fund bond holdings, by the end of 2023, 50.49% of QDII fund bond investments were directed towards U.S. medium-term government bonds, 18.36% towards Chinese (Hong Kong) overseas bonds, 12.22% towards U.S. short-term government bonds, 10.01% towards policy bank bonds in China, 8.05% towards Chinese government bonds, and less than 1% towards corporate bonds outside China.

**Funds:** Investment regions and asset types are more diversified.

By the end of 2023, in the scale of passive QDII funds, 47.15% tracked Hong Kong market indices, 28.52% tracked U.S. market indices, and 23.16% tracked indices related to Chinese concept stocks.

In terms of industry distribution of the indices tracked, 72.68% tracked information technology-related indices, 16.09% tracked broad-based indices, 6.90% tracked pharmaceutical-related indices, and 1.80% tracked oil and gas-related indices.

Passive QDII funds mainly track equity indices, with only a few tracking REITs indices.

In active QDII funds, a considerable amount of funds are allocated, with a fund market value of 6.935 billion yuan, accounting for 7.45% of the total asset value of active QDII funds.

QDII funds in the Indian market, gold, and global theme often hold more funds.

Although the names of most QDII funds do not include the word "FOF," they are actually Funds of Funds.

**Possible Reasons for Difficulty in Achieving Global Layout:** This report conducted in-depth interviews and questionnaire surveys with experts in the overseas investment business of various asset management institutions, collecting a total of 31 valid questionnaires.

The 10 domestic fund companies participating in the survey have a QDII quota of 19.72 billion U.S. dollars, accounting for 21.78% of the securities QDII quota; the QDII fund scale totals 108.349 billion yuan, accounting for 25.89% of the total QDII fund scale.

According to the questionnaire, the reasons for QDII funds investing less in other countries' assets can be summarized into four major categories: first, the cost of information acquisition; second, channel restrictions; third, behavioral factors; and fourth, risk management.

It is worth mentioning that from the global asset return situation and the questionnaire results, the scarcity of high-quality overseas targets and the expected returns on overseas assets are not the main factors hindering the global layout of publicly offered funds.

1.

**Cost of Information Acquisition:** The cost for domestic fund managers to obtain information about overseas markets is significantly higher than the cost of obtaining domestic market information.

Regardless of whether it is divided by the market invested in or the type of asset invested in, the cost of information acquisition is the most important factor restricting QDII funds from investing in other countries' assets.

On one hand, it is the research and investment cost.

The questionnaire results show that high research and investment costs and information asymmetry are the most important factors hindering publicly offered funds from achieving a global layout.

This includes high research costs caused by factors such as time differences, distance, and entry-exit restrictions, information asymmetry caused by cultural and language differences, and high research and investment costs caused by differences in trading mechanisms and market pricing mechanisms.

Academic research shows that due to local information advantages, investing in local companies may obtain higher excess returns.

Even if overseas information can be obtained, the information asymmetry formed by local information advantages is still an important reason for local preferences.

On the other hand, it is the talent cost.

Scholars such as Tang Yuehua found that the overseas background of fund managers and their understanding of the fundamentals of overseas companies are important sources of their information advantage in offshore markets, and funds with higher offshore concentration perform significantly better.

However, due to the high cost of introducing international talents, the current salary treatment of domestic fund companies is not attractive enough for talents with overseas research and investment capabilities who have studied or worked abroad, so international talents are relatively scarce, and domestic fund companies have very limited international research and investment strength.

In addition, domestic research has found that fund managers tend to invest in markets where they have worked or have citizenship, and since Chinese fund managers' overseas working areas are relatively limited to Hong Kong and the United States, QDII funds are also more invested in these markets.

2.

**Channel Restrictions:** The insufficient QDII quota has affected the global layout of publicly offered funds to a certain extent.

In recent years, the proportion of used QDII quotas has been increasing year by year.

Quota tension has led to QDII fund purchase restrictions on multiple occasions.

For example, on May 7, 2024, the S&P 500 ETF under Guotai Fund suspended subscriptions, and Changxin Global Bonds announced the suspension of large-amount subscription business.

Before that, overseas funds such as Huaxia Nasdaq 100 ETF, Nanfang Oil, Guangfa Dow Jones Oil Index, and Bank of Communications China Internet Index also announced purchase restrictions.

Wind statistics show that as of May 17, 2024, among 617 QDII funds, 338 were in a state of purchase restriction or "directly closed the door to customers," accounting for 54.8%.

In addition, some products have very "mini" purchase limits, such as Jing Shun Great Wall Nasdaq Technology Market Value Weighted Linked setting the single-day subscription limit to 10 yuan, Huaxia Overseas Income, Huaxia Greater China Credit Selection's daily subscription limit is 20 yuan, and the daily subscription limit for products such as Easy Fund Hong Kong Small Cap Index, Jing Shun Great Wall Nasdaq Technology ETF Linked RMB, and ICBC India Fund RMB is 100 yuan.

More than half of QDII funds are restricted, and behind this is the rapidly growing scale and scarce QDII investment quotas.

In addition, the quota limits the size of the fund, which in turn limits the management income of QDII funds.

The lower management fee income is difficult to support the higher research and investment costs, so fund managers find it difficult to invest in developing products that diversify risks globally.

As of the end of 2023, the average QDII quota for each securities institution was 1.207 billion U.S. dollars, with only three having more than 5 billion U.S. dollars in quota, and as many as 30 with less than 500 million U.S. dollars.

Many institutions with quotas below 500 million U.S. dollars, although approved to operate QDII funds, are unable to truly invest in overseas investment business due to the small approved quota.

The questionnaire survey shows that fund managers investing in other markets outside of Hong Kong and in bonds believe that the insufficient QDII quota is the most important reason restricting the global layout of QDII funds.

In addition, questionnaire respondents also mentioned that insufficient policy incentives, limited sales channels, and significant room for improvement in overseas custody and transaction clearing by domestic banks also hinder the global layout of publicly offered funds.

3.

**Behavioral Factors:** The behavioral tendencies of customers also lead to local preferences in publicly offered funds.

Domestic fund investors tend to invest in domestic assets and require a high premium for unfamiliar overseas assets.

Funds investing in overseas markets have a lower recognition in the domestic market.

The questionnaire results show that meeting customer needs is an important limiting factor second only to high information acquisition costs and channel restrictions.

Academic research has found that people tend to invest in assets of familiar areas and overestimate the risks of foreign assets.

Local preference stems from an inherent psychological bias of investors, and investors' attention is limited, with ambiguity aversion towards non-local assets.

Empirical studies based on A-shares show that individual investors' excessive attention to local companies weakens the pricing efficiency of A-shares, and investors' behavioral biases are highly explanatory of the local bias phenomenon in the A-share market.

The principal-agent problem of fund companies leads to insufficient motivation for fund managers to diversify global risks.

The income of fund managers is closely related to the size of the fund and has little to do with the ability to diversify risks, so fund managers often have no motivation to make a global layout to diversify risks for investors.

At the same time, managing funds investing in overseas assets will involve more issues, but the management fee ratio of actively managed equity QDII funds (average 1.4%) and actively managed equity funds investing in domestic assets (average 1.2%) is not much different.

In addition, catering to customer needs and creating "blockbuster" products is a more "economical" choice for fund companies, so fund companies are unwilling to invest energy in investor education and global layout for investors' long-term returns.

4.

**Risk Management:** Geopolitical risks and concerns about sanctions and suppression measures also lead fund managers to be reluctant to make a global layout.

After the outbreak of the Russia-Ukraine war, the U.S. and Western countries have introduced a series of dense economic sanctions against Russia, including removing some Russian banks from the important information transmission system of SWIFT, restricting the Russian central bank from using its more than 60 billion U.S. dollars of foreign exchange reserves, imposing transaction restrictions on some Russian sovereign debts, listing more than 120 Russian-related entities in the most severe financial sanctions list SDN, and freezing the assets of some Russian banks.

In recent years, the United States has taken a series of intervention and suppression measures against China.

Recently, there is still a lot of information unfavorable to Chinese enterprises and capital going overseas being released, including the U.S. Senate passing the "Biological Security Act," which will have a huge impact on the overseas business of Chinese companies such as WuXi AppTec and BGI; the U.S. House of Representatives naming the prevention of threats to U.S. national security such as TikTok; the European Union's official journal published the European Commission's implementing regulations on the registration of Chinese electric vehicles, which will serve as the basis for the European Union to impose retroactive tariffs on Chinese electric vehicles; U.S. Commerce Secretary Gina Raimondo said that the United States may further tighten control over China's access to advanced chip technology, and so on.The high cost of overseas accountability is also one of the obstacles.

If the overseas companies invested by the fund have financial fraud and other issues, the cost, difficulty, and duration of transnational lawsuits are high.

Transnational litigation requires the hiring of both domestic and foreign lawyers, and the cost of paying lawyers alone is a considerable expense.

For example, in some countries in Europe and America, lawyers charge hundreds of dollars per hour.

Although in countries like the United States, it is possible to adopt a contingency fee arrangement, which means that the cost of the lawsuit is entirely borne by the law firm, and once the lawsuit is won, the lawyer extracts remuneration according to the agreed proportion.

However, the contingency fee is very high, far higher than the normal agency fee.

Moreover, in some Commonwealth countries, there is no such contingent agency arrangement.

In some countries, if the defendant countersues, the court may also require the plaintiff to provide a guarantee, which is also a considerable expense [21].

On the contrary, if there is a situation that requires accountability for Chinese concept stocks, since their corporate headquarters are within the territory, the advancement of related litigation will be easier, the cost will be lower, and the cycle will be shorter.

Survey research shows that fund managers investing in markets other than Hong Kong, China, and investing in stocks pay more attention to the high cost of accountability.

Exchange rate fluctuation risk is also a concern for fund managers when deploying overseas assets.

Investing in overseas assets requires additional consideration of exchange rate fluctuations when remitting in and out, and the uncertainty of exchange rates leads to instability in investment returns, increasing the difficulty of product income management.

Exchange rate fluctuations can also lead to a decrease in investment returns.

If the currency of the invested country depreciates, the local currency return obtained from the investment will decrease, leading to capital loss.

Bond-type QDII products need to consider locking exchange rates very much, because the level of returns for bonds is not high, and if there is an exchange rate fluctuation, in extreme market situations, it is possible to lose all the returns of a year [22].

Exchange rate risk management will also increase the cost of fund management, and fund companies need to invest in research on exchange rate fluctuations and hedge risks through lock exchange rate tools.

In addition, the depreciation of the renminbi in recent years has also led to an increase in the proportion of QDII used, and exchange rate fluctuations have further increased the difficulty of overseas asset layout.

04 Policy Suggestions 1.

Encourage the development of QDII-ETF and QDII-FOF products.

ETF focuses on macro trends, and the cost of investment research is relatively lower.

The development of QDII-ETF in different asset categories in multiple global markets can greatly enrich the types of assets that Chinese investors can invest in under the condition of lower investment research costs, and enhance the ability of Chinese investors to achieve risk diversification through global layout.

QDII-FOF is currently a rare product category, but it has great development space.

Fund managers can focus on asset allocation, develop QDII-FOF holding overseas market funds to achieve global layout and diversify risks.

For example, China Merchants Pu Sheng Global Allocation, this QDII alternative investment fund, has well practiced the pension target risk strategy.

Such funds achieve longer-term goals through diversified global asset investment.

Since its establishment, the unit net value has increased by nearly 25%, far exceeding the increase of most funds invested in the territory during the same period.

It is possible to consider giving tax or rate preferences to qualified QDII-ETF and QDII-FOF products in the establishment, operation, and investment links to encourage their development.

For example, a certain proportion of discounts can be given to the establishment costs and registration fees in the establishment link to reduce the establishment costs; tax reductions can be made on management fees, custody fees, etc.

in the operation link; the taxes paid on overseas income in the investment link can be deducted within the territory.

2.

Encourage the inclusion of more multinational companies in the Hong Kong Stock Connect.

At present, although the Hong Kong Stock Connect mechanism has opened a convenient channel for domestic funds to invest overseas, we must admit that there are still relatively few high-quality international company targets in the Hong Kong Stock Connect.

According to the statistical data at the end of 2023, the proportion of companies included in the Hong Kong Stock Connect whose office addresses are outside the mainland of China is only 19.93%.

At the same time, many companies with office addresses outside the mainland of China also have their main business concentrated in the mainland of China.

This means that although the Hong Kong Stock Connect provides a convenient channel for overseas investment, investors can still only contact a limited number of companies with international background and strength when choosing.

As the most convenient way for domestic investors to invest in overseas stocks, the restrictions on the investment quota and trading mechanism of the Hong Kong Stock Connect are relatively small.

If more high-quality multinational companies can be included in the Hong Kong Stock Connect, domestic financial institutions will be able to achieve global layout more conveniently.

Academic research has found that holding multinational companies can improve fund performance - multinational companies have lower transaction and information costs, and at the same time, the overseas income of multinational companies can effectively reduce the local bias problem of the fund investment portfolio, forming profitable investment opportunities [23].

The deep layout of multinational companies in the Chinese market will provide the possibility for the Hong Kong Stock Connect to include more high-quality international company targets.

In addition, encouraging domestic companies to go overseas and include the Hong Kong Stock Connect can also help financial institutions solve the restrictions of overseas investment mechanisms.

With the continuous improvement of regulatory policies and the increasing maturity of market mechanisms, the role of the Hong Kong Stock Connect in attracting international capital and promoting the interconnection of domestic and foreign markets will be further highlighted.

We look forward to more multinational companies choosing to list in Hong Kong in the future and including the Hong Kong Stock Connect mechanism.

This will provide more investment options for domestic investors, and will also promote the further development and internationalization of the Hong Kong stock market.

3.

Improve the regulatory details of cross-border TRS and other derivative products.

Several securities firms with cross-border TRS qualifications have been required to prohibit new cross-border TRS investments by the end of January 2024.

Some domestic funds invest in the overseas bonds of urban investment through TRS, and the market speculates that the regulation may be proposed to control the risk of new hidden debt of urban investment enterprises [24].

Last year, some urban investments facing huge repayment pressure used relatively easy-to-issue one-year overseas bonds as short-term bridging funds, and paid a high cost of funds, including higher yields than domestic and the cost of subscribing funds to go abroad, there are great risks [25].

At present, some overseas bonds of urban investment cannot complete the record, and it is difficult to enter the next issuance process; some banks also no longer issue standby letters of credit with guarantee effect for the overseas bonds of urban investment.

This report believes that the cross-border TRS should not be "one size fits all" because of the risk of overseas bonds of urban investment.

The advantage of TRS is that the quota is not limited, and the second is that the exchange rate exposure is small.

Since there is no process such as currency exchange transactions, its principal part is not affected by exchange rate fluctuations, and only the profit and loss part has foreign exchange exposure, and the exchange rate risk it is subject to is also lower [26].

Although the TRS channel still has problems such as high costs and difficulty in adjusting positions [27], public funds can invest in the overseas bond market through TRS, which can make up for the restrictions of overseas investment mechanisms and enrich the assets of global allocation.

Regulation should improve the management details of cross-border TRS, implement precise control of the risks of overseas bonds of urban investment, and encourage the allocation of global high-quality assets through TRS.

4.

Optimize the incentive mechanism of fund managers.

At present, the fund management fee is basically only linked to scale, and only one QDII fund collects a floating management fee, which to some extent leads to differences in income needs between fund managers and fund investors.

In order to make the incentive model of fund managers more consistent with the interests of fund investors, more consideration should be given to indicators that measure income and risk in the calculation of management fees.

In addition, current fund managers tend to pursue short-term income too much and ignore the consideration of long-term layout.

This short-sighted behavior is not conducive to the stable development of the fund and cannot bring continuous and stable returns to investors.

Therefore, the incentive mechanism of the fund company should incorporate more long-term performance considerations, encourage fund managers to pay attention to long-term returns, and continue to create income for investors.

Under the existing fund company governance system, fund managers tend to serve the shareholders of the management company rather than the fund investors.

Fund managers may consider the interests of the company's shareholders more when making decisions, rather than the interests of investors.

In order to change this situation, we should reflect the long-term risk and income ability of managers more in the interest distribution mechanism, so that the interests of fund managers are more consistent with the interests of investors.

The optimization of the incentive mechanism can refer to international experience: 1) The decision factors for the year-end bonus of fund managers of Franklin Templeton Investments include not only quantitative indicators of fund performance, but also qualitative indicators such as stock recommendation value, team collaboration, and the complexity of managing funds/special accounts.

Performance assessment includes single-period returns relative to the benchmark for one, three, and five years.

2) The year-end bonus of American Funds mainly depends on the pre-tax rolling returns relative to the benchmark for one, four, and eight years, with four and eight years of performance occupying the main position.

3) The bonus of fund managers of T. Rowe Price is largely linked to the 1-year, 3-year, 5-year, and 10-year performance of the fund, and its performance assessment benchmark combines absolute returns, relative returns, and risk-adjusted returns.

[28] The characteristics of excellent incentive mechanisms are similar: comprehensive and balanced, and more focused on long-term investment performance.

A performance assessment mechanism dominated by medium and long-term is more conducive to the long-term interests of holders, and can eliminate the short-term performance pressure of fund managers and encourage long-term investment; introducing relative returns and risk-adjusted returns into performance assessment can effectively curb the impulse of fund managers to take additional risks to obtain short-term excess returns, and ultimately protect the interests of holders.

When fund managers pay more attention to long-term risk-adjusted returns, they are more motivated to diversify risks through global layout.5.

Encourage the establishment of overseas subsidiaries to strengthen overseas cooperative funds.

Companies stepping out to establish subsidiaries and branches is also an important measure for global layout, which helps to enhance the ability of public funds to invest in international markets and solve the problem of insufficient global layout.

Data from the "Institutional Regulatory Situation Report" shows that, as of the end of 2022, a total of 26 public fund management companies have established 27 first-level overseas subsidiaries and 7 second-level overseas subsidiaries, including 27 in Hong Kong, 3 in the United States, and 2 each in the United Kingdom and Singapore.

As of the end of 2022, the total asset management scale of the overseas subsidiaries of the funds was about 400 billion yuan, with 80% of the managed assets invested in the Chinese market (including the Hong Kong market).

Fund companies should actively seek cooperation with large overseas asset management companies to mitigate the problem of information asymmetry through cooperative management of products.

In addition, fund companies can assist domestic listed companies to go global through their overseas subsidiaries.

Chinese enterprises going global can also help public funds better solve the restrictions on investment mechanisms and achieve a global layout.