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Following the consultation paper issued in January 2019, on 25 September 2020, China Securities Regulatory Commission (CSRC), People’s Bank of China (PBOC), and State Administration of Foreign Exchange (SAFE) jointly issued the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors (QFII) and RMB Qualified Foreign Institutional Investors (RQFII) (CSRC Decree No.176, 合格境外机构投资者和人民币合格境外机构投资者境内证券期货投资管理办法, the Measures, available here in Chinese and here in English) and the Provisions on Issues Concerning the Implementation of the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (CSRC Announcement  No.63, 关于实施《合格境外机构投资者和人民币合格境外机构投资者境内证券期货投资管理办法》有关问题的规定, available here in Chinese and here in English, the Provisions, collectively with the Measures, the New Rules). The New Rules will come into effect from 1 November 2020, and at the same time the measures and provisions currently governing QFII regime and RQFII regime (Old Rules) will be repealed.
The QFII and RQFII regimes were introduced in 2002 and 2011 respectively, and have played a major role in encouraging foreign participation in China securities markets. Since the introduction of other cross-border regimes such as stock connect and bond connect, the QFII and RQFII regimes have met with competition. In order to regain ground, China regulators have been amending the rules, e.g. removing repatriation restrictions such as lock-up periods and prior approvals. In particular, in May 2020, PBOC and SAFE issued the Regulations on Funds of Securities and Futures Investment by Foreign Institutional Investors (境外机构投资者境内证券期货投资资金管理规定, the Funds Regulations, effective from 6 June 2020), according to which the restriction on investment quotas for QFII/RQFII was uplifted. For more information on the Funds Regulation.
The New Rules are also aiming to make the QFII and RQFII regimes more attractive to foreign investors. We set out below key points of the New Rules for your reference.
1. Relaxing qualification requirements and facilitating investment and operations
Merger of QFII regime and RQFII regime
The Funds Regulations effective from 6 June 2020 have unified the regulations on funding for QFII and RQFII. When the New Rules come into effect on 1 November 2020, the QFII regime and the RQFII regime will be officially merged and will be subject to the same set of rules, including the qualification requirements and regulations on operations. We note that under the New Rules, QFII and RQFII are collectively referred to as “qualified foreign investor” (QFI).
Under the merged QFI regime, an applicant only needs to apply for the QFI qualification once, and does not need to apply for two (QFII and RQFII) qualifications separately. For investors who have already obtained either a QFII or RQFII licence, they do not need to re-apply for the other licence and will be regarded as a QFI licence holder automatically. QFI licence holders may freely choose to remitfunds in foreign currencies and/or offshore RMB to China to carry out domestic securities and futures investments, provided that separate cash accounts are duly opened in China.
Relaxing qualification requirements
The New Rules have relaxed qualification requirements for QFI applicants. For example, the requirement for a minimum period of operation and the requirement for a minimum amount of assets under management have been removed. Meanwhile, the requirements remain for sound financial condition, good credit standing, experience in securities and futures investment, governance structure, internal control systems, and compliance management.
According to the New Rules, QFIs include foreign fund management institutions, commercial banks, insurance companies, securities companies, futures companies, trust companies, government investment management companies, sovereign funds, pension funds, charity funds, endowment funds, international organisations and other institutions recognised by the CSRC. It is worth noting that the New Rules have removed the proviso “in order to encourage middle and long-term investments, preference shall be given to the pension funds, insurance funds, mutual funds, charity funds and other long-term capital management institutions” as stipulated in the Old Rules. We understand this may attract more hedge fund managers and private equity fund managers to apply for the QFI qualification.
Streamlining application procedures
The application procedures have been streamlined. The qualification requirements have been relaxed, and therefore the application materials to be submitted have been simplified. For example, an applicant does not need to submit the audited financial statements for the latest year, which has been a concern for many applicants, nor its investment plan as required under the Old Rules. Further, the CSRC review period has been shortened from 20 to 10 business days.
Appointment of service providers within China
Previously each QFII/RQFII could authorize up to three securities companies within China to conduct securities transactions on the Shanghai Stock Exchange and Shenzhen Stock Exchange respectively. Under the New Rules, there is no limit on the number of securities companies/futures companies that a QFI may entrust to conduct domestic investments.
The Funds Regulations have already removed the limit on the number of custodians a QFI may appoint in China, and this has also been reflected in the New Rules.
Further, the New Rules stipulate that a QFI can appoint a domestic private securities investment fund manager, which is under its control or under the same control of a common parent company, as its investment adviser. We anticipate this will benefit foreign institutions who have their wholly owned private fund managers (normally referred to as WFOE PFMs) in China.
2. Expanding Investment Scope
In addition to the original scope, the New Rules expand the permissible investment scope for QFIs to include securities admitted on the National Equities Exchange and Quotations (NEEQ) market, private investment funds, financial futures, commodity futures, options, etc., and QFIs may participate in bond repurchase transactions, margin trading and securities financing on stock exchanges, and securities lending to securities finance companies.
We consider this amendment as the most significant and impactful improvement of the QFII/RQFII regime. According to the New Rules, financial products including financial derivatives contracts as well as related trading models will be gradually relaxed for QFIs’ access in an orderly manner. This will be announced by the CSRC upon agreement with PBOC and SAFE.
3. Enhancing ongoing supervision
The New Rules set out regulatory measures and penalties for specific circumstances where QFIs and/or QFI custodians violate applicable rules and regulations. Cross-market surveillance, cross-border supervision and see-through regulations are also enhanced.
It should be noted that the investment restrictions for foreign investors have been maintained. The shareholding of a single QFI or any other foreign investor must not exceed 10% of the total number of shares of an exchange-listed or a NEEQ-admitted company. The aggregate shareholding of all QFIs and other foreign investors must not exceed 30% of the total number of shares of an exchange-listed or a NEEQ-admitted company.
We anticipate the key amendments will help the QFI regime regain popularity. We will monitor developments and keep you updated.
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