Mainland China briefing: proposed merger of QFII and RQFII

On 31 January 2019, the China Securities Regulatory Commission (CSRC) issued consultation papers on the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (Measures) (available here) and the Provisions on Issues Concerning the Implementation of the Measures (Provisions) (available here) to merge the qualified foreign institutional investors (QFII) and RMB qualified foreign institutional investors (RQFII) regimes and ease some restrictions to make the inbound investment channels attractive again to foreign institutional investors. The consultations closed on 2 March 2019. 

The main revisions and clarifications in the Measures and the Provisions are as follows: 

1. Consolidating the QFII and RQFII schemes into one and relaxing qualification requirements. The Measures and Provisions consolidate the two schemes into one, with the QFII rules as the base while incorporating some RQFII provisions, thus forming one unified set of rules. Under the current QFII/RQFII rules, although the QFII and RQFII schemes are similar in nature, QFII applicants are subject to extra requirements on the minimum term of operation and size of assets under management (AUM), whereas the requirements for RQFII applicants are relatively relaxed. The Measures remove the minimum operation period and AUM requirements under the QFII scheme and unify QFII and RQII qualification requirements. Foreign institutions will be able to apply for both QFII and RQFII licences at the same time. For institutions domiciled in jurisdictions that have not yet qualified for the RQFII regime, investment funds can only be raised and remitted in foreign currencies, which might need to be converted into RMB before making investments in mainland China.

The CSRC explains that the legislative intention of the qualification relaxation is to achieve harmonization of entry standards for foreign institutional investors employing different access channels. For example, overseas hedge fund managers can access the mainland’s capital markets by Stock Connect and Bond Connect, with no RQII or QFII licence requirement.

The Provisions remove the example lists of different types of institutional investor applicants, which currently includes charity funds and pension funds but keeps silent on hedge funds. In the past, the CSRC has persuaded some prestigious hedge funds managers to give up their QFII/RQFII licence applications without an explicit ground for rejection. The removal of the list might be considered a hint that the regulator’s attitude to hedge fund managers’ applications has changed.    

2. Expanding the investment scope.The current investment scope of the QFII and RQFII schemes includes China A-shares, bonds, public investment funds and stock index futures. The Provisions expand the investment scope to include more products: 

  • Private investment funds. This will greatly benefit the wholly foreign-owned enterprises private fund managers (WFOE PFM). For overseas asset management companies intending to participate in private fund businesses in China, it helps solve the lack of local fundraising source at their initial stage. WFOE PFMs could use their affiliates’ QFII or RQFII quota as seed monies for new fund products to comply with the requirement to launch a private fund within six months of obtaining a PFM licence. The Provisions also explicitly permit QFIIs and RQFIIs to appoint their affiliated WFOE PFM as investment adviser to provide investment advisory services for their investments in mainland China.   
  • NEEQ stocks, i.e. stocks admitted to the National Equities Exchange and Quotations (NEEQ or New Third Board) market, mainland China’s main over-the-counter equity market. If a QFII or RQFII invests in this market, a cap similar to the China A-share investment shareholder cap for foreign investors will apply. Shares held by a single QFII/RQFII must not exceed 10% of the total shares of one company and aggregate shares held by all foreign investors must not exceed 30% of the total shares of one company. 
  • Additionally, QFIIs and RQFIIs will be allowed to engage in bond repurchase transactions and invest in derivatives including financial futures, commodity futures and options. 

3. Clarifying beneficial ownership of assets. The Provisions stipulate that QFIIs and RQFIIs should open separate securities and futures accounts for proprietary and client funds respectively. For QFII/RQFII accounts named in the format of “Qualified Investor + Client Name” or “Qualified Investor + Client Fund”, ownership of the assets in the accounts will belong to the client and should be kept independent of the assets of the QFII/RQFII and custodian. A QFII/RQFII should set up subsidiary accounts for relevant funds and products under its “Qualified Investor + Client Fund” account, verify identities of investors and report relevant investors’ information via the QFII/RQFII custodian within 10 business days following the end of each quarter. 

4. Optimizing management of custodians. Under the prevailing QFII/RQFII rules, a QFII can only appoint one mainland custodian and an RQFII can appoint no more than three. The consultation papers suggest that such restrictions on the number of custodians will be removed. If there are more than two custodians appointed, the QFII/RQFII should appoint one of them as the principal custodian responsible for licensing and quota applications, reporting and filing. 

We will monitor progress and share developments with the final Measures and Provisions.