About QFII

On December 5, 2002 the China Securities Regulatory Commission (CSRC) and the People’s Bank of China (PBOC) jointly issued the Provisional Measures on Administration of Domestic Securities Investments of Qualified Foreign Institutional Investors (the “QFII Regulation”), effective on December 1, 2002. The regulation is regarded as a monumental piece of legislation, which, for the first time in China’s history allows foreign investors to invest and trade in domestic securities market.

In China, QFII is defined as any foreign fund management institutions, insurance companies, securities firms, and asset management companies. The QFII applicants have to meet the requirements stated in the QFII Regulation and obtain the approval from CSRC and investment quota from the State Administration of Foreign Exchange (SAFE). Hong Kong, Macao, and Taiwan are also applicable regions of the regulation. Aside from qualitative requirements on QFII such as sound financial and credit status and no material sanctions by regulatory agencies within three years, etc, the qualifications of a QFII also include, more importantly, minimum assets under management and years of business operations, detailed as follows:

What can QFII invest in?

A QFII invest in(i) publicly listed shares on the Shanghai or Shenzhen Stock Exchange other than B shares; (ii) publicly traded treasury bonds, convertible bonds and corporate bonds; (iii) other financial instruments approved by CSRC.

There is a limit to the breadth of the regulation in that (i) an individual QFII may not hold more than 10% of the total outstanding shares of any single listed company and (ii) in any single listed company, the total combined shares held by all QFIIs may not exceed 20% of the total outstanding shares of the listed company.

In order to encourage and attract medium and long-term investment, the QFII Regulation states that preference is given to institutions managing closed-end China-focused funds, or pension funds, insurance funds and mutual funds in other markets with good investment records.

Application Process

There are currently 11 banks in China (both foreign and Chinese) that have qualified to undertake custodian business:

Custodians

A qualified Chinese commercial bank and a foreign bank’s Chinese branch can be acted as a custodian. After selecting a custodian, a QFII needs to open a special RMB account with the custodian bank, and only remit foreign capital, which then convert, to RMB to that account. As of December 2005, there are 11 banks in China that are qualified for the custodian business:

A custodian bank’s main job is to safeguard all the assets that the QFII has put under its custody; conduct all QFII related foreign exchange settlement, sales, receipt, payment and RMB settlement businesses; supervise investment activities of QFII, and report to CSRC and SAFE in case QFII investment orders are found to have violated laws or regulations; and compile an annual financial report on QFII’s domestic securities investment activities in the previous year.

Repatriation

The repatriation of principal and yield are subject to conditions stated in the regulation. In the case that a QFII is a closed-end Chinese fund management company, it can mandate its custodian, with the submission of required documents to SAFE to apply for purchase of foreign exchange for the repatriation of principals by stages and by batches three years after its remittance of the principals. The amount of each batch of principal repatriation should not exceed 20% of the total principals, and the interval between two repatriations should not be less than one month.

Other types of QFII can mandate their custodians, with the submission of required documents, to apply to SAFE to repatriate the principals by stages and by batches one year after their remittance of the principals. The amount of each batch of principal repatriation should not exceed 20% of the total principals, and the interval between two repatriations should not be less than three months.

In addition, when a QFII remits all or part of its principal out of China, it has to apply for a new investment quota in order to bring the principal back into the country.

Regulatory Agencies

CSRC and SAFE are the regulators of the securities investment activities conducted by QFIIs. They are responsible for overseeing all transactions and conducting annual inspections on QFIIs.

CSRC is the approval authority for QFII status. It interprets the rules regarding QFII and acts the role of a general regulator.

SAFE is responsible for overseeing business tied with foreign exchange operations, such as the approval of the QFII investment quotas, issuance of the foreign exchange certificate, supervision of account management and foreign exchange settlements.

Fund China Editor Collated

Copyright Fund China 2009.

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