The QFII system was introduced in China in 2002, the RQFII followed in 2011. These two schemes were implemented to encourage foreign participation in China’s financial markets.
Besides the QFII and RQFII, there were also other programs launched which enabled foreign investors to invest into China. One such programs is the Shanghai-Hong Kong Stock Connect launched in 2014.
The Shanghai-Hong Kong Stock Connect enabled foreign investors (not residing in mainland China) to trade A-shares listed on the Shanghai Stock Exchange (SSE) via the Hong Kong Stock Exchange (HKSE). Clearly, stock connect delivered two distinct advantages over the QFII & RQFII schemes, namely no licence is required, Stock Connect is open to institutional investors or individual investors who qualify. Moreover, there are no restrictions on the repatriation of proceeds.
Even so, Stock Connect did not totally oust the QFII/RQFII schemes. This is because QFII/RQFII are available for a wider range of investment instruments, including bonds, investment funds and IPOs. Furthermore, while each of Stock Connect, RQFII and QFII are subject to aggregate investment caps (investment quota has been removed effective from Jun 6, 2020), each cap is independent of the other, so an investor could invest through the QFII or RQFII schemes should its Stock Connect cap were maxed out. Nonetheless, these additional channels, did present more options to foreign investors to directly invest China’s financial markets.
To stay relevant, the QFII & RQFII schemes had been slowly evolving through the years. In 2019, SAFE doubled the quota for the QFII program from $150 billion to $300 billion. Another recent change was in 2018. There was a round of foreign exchange administration reforms for QFII and RQFII to further simplify and facilitate cross-border investment. The regulatory changes mainly removed the cap on outbound remittances and the 3-month principal lock-in period.
Following implementation of the May 2020 policy reforms, Institutional investors participating in the QFII and RQFII schemes would still be subject to qualification requirements and ongoing account management / compliance obligations. However, they would not need to apply for an individual quota on investment.
A summary of the changes of the QFII and RQFII schemes since May 2020 is presented below:
1.Removal of investment quota restriction.
Foreign institutions will not be subject to any investment quota. After obtaining qualifications as an QFIIs / RQFIIs from the CSRC, they only need to engage their onshore custodian to register with SAFE before opening a custodian account for cross-border investments transactions.
2.Multiple currencies allowed
For its currency remittance into China for its capital investments, QFII / RQFII now have more options:
- Remitting only foreign currency (“FX”): it must open a FX special account and its corresponding RMB special deposit account;
- Remitting only RMB: it must open a RMB special deposit account;
- Remitting both FX and RMB: it must open separate accounts for a and b above and the RMB should not be allowed to flow between the two accounts.
3.Easier repatriation of funds
Before the changes, investors need to produce audited report and tax payment certificate to repatriate funds out of China. Under the new rules, QFIIs / RQFIIs only need to produce a letter to commit to tax payment. Audit report and tax filing form are only mandatory for final repatriation of capital and profits when the open-ended QFII / RQFII fund is wound up. Nonetheless, the currencies to be repatriated should be consistent with the currencies injected, to prevent arbitraging between FX and RMB.
4.More than one onshore custodian allowed
Besides the principal reporting custodian designated for their QFII investments, QFIIs may entrust multiple onshore custodians.
5.Broader hedging allowed
QFIIs will no longer need to adjust their FX derivative positions monthly, unlike under the old rules.
Moreover, QFIIs / RQFIIs will have access to a broader range of financial derivatives for hedging purposes, so long as the exposure hedged reasonably correlate with the risk exposure of the underlying onshore securities investment.
Stay tuned to the next post to see what implications follow from these latest changes.
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