The China Securities Regulatory Commission (CSRC), People’s Bank of China (PBC), and State Administration of Foreign Exchange (SAFE) released the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors (QFII) and RMB Qualified Foreign Institutional Investors (RQFII) on September, 25th , 2020. The CSRC is simultaneously releasing an implementary rule, Provisions on Issues Concerning the Implementation of the Measures for the Administration of Domestic Securities and Futures Investment by QFIIs and RQFIIs. These Measures and Provisions are to take effect on 1 November 2020. The following article seeks to give some understanding on the QFII and RQFII schemes.
Earlier this year in May, PBC and SAFE jointly issued the Administrative Provisions on Domestic Securities and Futures Investment Capital of Foreign Institutional Investors (PBOC & SAFE Circular  No. 2) (“Administrative Provisions”). This move was to simplify the management requirements for domestic securities and futures investment capital of foreign institutional investors, further facilitating foreign institutional investors’ participation in China’s financial market. The regulation changes are a follow up on the decision by SAFE on September 10, 2019, to remove the investment quota cap on QFIIs and RQFIIs and instead implement a registration-based system for cross-border capital inward remittances and exchanges by Qualified Investors. Hence qualified foreign investors only need to register to transfer funds in and out of the country.
Before we delve into the anticipated changes to come, let us take a step back to understand how things work under the two investment systems that played a critical role in China for the past almost two decades.
What are the QFII & RQFII schemes?
The QFII and RQFII are China’s two main inbound investment schemes introduced in 2002 and 2011 respectively to encourage foreign participation in its financial markets.
A summary of the key features of the two schemes is presented below:
Who are QFII and RQFII?
- QFII - A foreign institutional investor investing in China’s financial markets with offshore foreign currency and then convert into RMB to invest.
- RQFII - A foreign institutional investor investing in China’s financial markets with RMB outside mainland China.
Who are the key regulators in this equation?
- PBOC - People’s Bank of China
- SAFE - State Administration of Foreign Exchange
- CSRC – China Securities Regulatory Commission
What can QFII and RQFII invest in?
- Stocks, bonds, warrants traded on Shanghai / Shenzhen stock exchanges
- Securities investment funds
- Fixed income products on interbank bond market
- Stock index futures (on hedging purpose)
What are the permissible fund sources?
- Offshore funds raised from an open-ended fund managed by the QFII/ RQFII
- Offshore funds entrusted by investors in a segregated discretionary management investment account
- Proprietary funds of the QFII and RQFII
What is the quota requirement?
- base investment quota which is filed with SAFE (up to a certain percentage of AUM / asset size)
- any investment beyond base investment requires prior approval from SAFE
- Quota is not transferrable.
- Investment quota requirement has been abolished effective from Jun 6, 2020.
How are funds repatriated out of China ?
- Investment proceeds need to be audited by a Chinese accountant.
- Attached with audit report produced by a Chinese accountant and tax payment certificate.
- Since May 2020, the tax audit report and tax payment certificate requirements were replaced with a letter of commitment to pay the taxes.
Are derivatives trading permitted under these schemes?
- Only for hedging exchange rate risk from currency conversion. Investors are required to adjust forex derivative positions monthly in accordance with the scale of RMB assets, corresponding to the domestic securities investments in the preceding month, to adhere to the principle of genuine needs.
- Only interest rate forwards, interest rate swaps (IRS), bond forwards and stock index futures (on hedging purpose).
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Since the QFII and RQFII are iconic schemes in China’s financial markets, which existed for close to the past two decades, it would have gone through some developments and changes throughout the years. Stay tuned to our next post to further understand the developments and comparisons with other schemes through the years.
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