Latest development of the RQFII Regime

The Renminbi Qualified Foreign Institutional Investor (RQFII) program was firstly introduced in December 2011, which has been proved to be popular among investors. To keep up with the growing demands of the market and investors, the competent authorities in China lately implemented a set of new regulations aiming at further promoting the RQFII program.

On March 1, 2013, the China Securities Regulatory Commission (CSRC), the People's Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) jointly promulgated the Measures for the Pilot Program of Securities Investment in China by RMB Qualified Foreign Institutional Investors (RQFII Pilot Measure) (人民币合格境外机构投资者境内证券按投资试点办法). On the same day, the CSRC issued its implementing rules to the RQFII Pilot Measure, namely the Provisions on the Implementation of the Measure for the Pilot Program of Securities Investment in China by RMB Qualified Foreign Institutional Investors (CSRC Implementation Provisions) (关于实施《人民币合格境外机构投资者境内证券投资试点办法》的规定). On 11 March, SAFE also promulgated new implementing rules relating to the RQFII Pilot Measure, the SAFE Circular on Issues Concerning the Pilot Program of Securities Investment in China by RMB Qualified Foreign Institutional Investors (SAFE Circular) （国家外汇管理局关于人民币合格境外机构投资者境内证券投资试点有关问题的通知）. The above three regulations have superseded the respective existing RQFII rules which were issued in 2011, and the new rules are collectively regarded as the New RQFII Rules. In this article, we summarize some main changes under the New RQFII Rules which we believe are worth noting:

Expansion of the scope of eligible institutional investor

Under the old RQFII regime, only Hong Kong subsidiaries of PRC fund management companies and securities companies are qualified to participate in the RQFII program. One of the great developments in the New RQFII Rules is that, such limitation has been relaxed and the scope of eligible institutions has been expanded which also includes (i) Hong Kong subsidiary of PRC commercial bank, (ii) Hong Kong subsidiary of PRC insurance company, and (iii) financial institution with registration place or major business place in Hong Kong.

The expansion seems to allow foreign financial institutions domiciled in Hong Kong to participate in the RQFII program, which means international banks and fund houses based in Hong Kong may also be able to apply to participate in the program

Relaxation on the investment scope

Under the New RQFII Rules, RQFII is allowed to invest in a variety of RMB financial instruments, which include:

1. stocks, bonds and warrants traded or transferred on stock exchanges;
2. fixed-income products traded in the inter-bank bond market;
3. securities investment funds;
4. equity index futures; and
5. other financial instruments permitted by the CSRC.

It has been made clear in the New RQFII Rules that RQFII is allowed to invest in equity index futures. In addition, it is worth noting that the provision requiring at least 80% of the funds to be invested in bonds and other fixed income securities and no more than 20% of the funds to be invested in stocks or stocks investment funds has been removed in the New RQFII Rules. In other words, under the new RQFII regime, investor will be more flexible in determining the type of products to invest.

However, certain restrictions still exist, as the New RQFII Rules provides that with respect to investment in stocks of listed Chinese companies, the ceiling for the shareholding of a single foreign investor in the total share capital of a listed Chinese company is 10%, and the ceiling for the aggregate shareholdings of all foreign investors in the "A" shares of a listed Chinese company is 30%. But for foreign investors who make strategic investment in a listed Chinese company in accordance with the Administrative Measures for Strategic Investment in Listed Companies by Foreign Investors (外国投资者对上市公司战略投资管理办法), such restriction will be excluded.

Relaxation of Qualification requirements

Certain qualification requirements for applicant to apply for the RQFII program have been removed in the New RQFII Rules. For instance, it is no longer necessary that the applicant's parent company has the qualification to engage in securities assets management business. The New RQFII Rules also do not require the applicant to prove that its parent company has not been subject to any serious punishments during the past three-year period.

Conclusion

In light of the above, we could expect that with the implementation of the New RQFII Rules, the RMB offshore market will likely to boost as the Chinese government has provided a more relaxing investment environment for offshore RMB. In the meanwhile, other than the Qualified Foreign Institutional Investors (QFII) program, foreign institution investors now seem to have one further option to enter into China's domestic capital market by applying for the RQFII qualification.