Domestic and foreign institutional investors’ behavior in China

This paper compares the investment characteristics between foreign funds operating under Qualified Foreign Institutional Investors (QFIIs) in China and domestic Chinese funds and analyzes the firm-level drivers that influence their allocation choices. The analysis reveals that foreign funds have a preference for a range of sectors such as transportation, metals and non-metals, and machinery, as opposed to industries with a requirement for local knowledge. The portfolios of domestic Chinese funds are distributed more evenly than those of the foreign funds. The comparative analysis indicates that foreign funds invest in firms that are significantly different from those favored by domestic funds in terms of size, profit, and compensation of management. Finally, we find that when making investment decisions, foreign funds tend to rely on some corporate governance indicators, which is not consistent with the results obtained from previous studies examining developed markets. In particular, foreign funds have a...