China issued new RQFII rules – benefiting managers licensed in Hong Kong

1.

Broadening of qualifying RQFIIs

Under the New RQFII Rules, Hong Kong subsidiaries of Chinese commercial banks and insurance companies, or financial institutions which are domiciled in and have their principal places of business in Hong Kong, can now apply for a RQFII licence and quota. Previously, only the Hong Kong subsidiaries of Chinese fund management companies and securities companies were permitted to qualify, and the licensed RQFIIs currently stands at 27 according to CSRC.

2.

Relaxation of investment restrictions for RQFII funds

In the past year, the only fund products permitted are: RQFII ETFs which invest in China A shares with reference to an index; or RQFII funds which invest not less than 80% of the assets in fixed-income securities, and may invest up to 20% in China A shares. Under the New RQFII Rules, these restrictions have been removed so that RQFII funds are permitted to have a variety of strategies such as investing equities only. Further, RQFII funds may invest in stock index futures.

In short, the New RQFII Rules brought the investment scope and restrictions for RQFII funds in line with existing rules applicable to Qualified Foreign Institutional Investors (QFII) scheme (operated since 2003 which permit qualified institutions to remit foreign currency funds into China for investment with a quota). Further, a RQFII has the advantage of daily liquidity whereas QFII is weekly; and the RQFII applicant has no asset under management requirement whereas the QFII required USD 5 billion to qualify.

We anticipate more fund managers in Hong Kong will seek to qualify for RQFII status and there will be more variety of fund products offered in the market.

Deacons acted for 14 out of the first batch of 21 RQFII managers and the largest RQFII ETF launched in Hong Kong in 2012. We acted for numerous QFII managers and QFII funds since 2005.

Please refer to the CSRC's announcement and new rules (Chinese only) from the CSRC website. On 25 January 2013, Deacons reported the Mutual Fund Recognition between Hong Kong and Mainland China initiative.