China consolidates the QFII and RQFII regimes

On September 25, 2020, the China Securities Regulatory Commission (CSRC), along with the People’s Bank of China (PBOC) and the State Administration for Foreign Exchange (SAFE), jointly promulgated the Measures for the Management of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (in Chinese: 《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) and the relevant implementation rules (collectively, the QFI Rules). These QFI Rules follow the relevant SAFE regulations issued in May of this year (the SAFE QFI Rules), which formally abolished the investment quota requirement imposed on qualified foreign institutional investors (QFIIs) and Renminbi QFIIs (RQFIIs). Click here to read our update on the SAFE QFI Rules.

The QFI Rules will come into effect on November 1, 2020 and will supersede the current regulations applicable to QFIIs and RQFIIs. QFIIs and RQFIIs are collectively referred to as QFIs. The QFI Rules aim to consolidate the previous separate regulatory regimes applicable to QFIIs and RQFIIs. A high level summary of the QFI Rules is set out below.

Relaxation of qualification requirements imposed on QFIs

Under the QFI Rules, QFIs will not be treated differently according to the currencies they use for investment; they will now be subject to the same qualification requirements. Although the QFII Rules have maintained the minimum qualification requirements which were previously applicable to QFIIs and RQFIIs (such as stable financial status, good creditability, sound corporate governance and no disciplinary penalty record, etc.), some of the more stringent criteria (e.g. minimum operation period requirement and asset management quantity requirement etc.) have been removed.

The relaxation of the qualification requirements will definitely attract more small- to medium-sized overseas institutional investors to invest in the Chinese financial markets.

Simplified application process

Under the QFI Rules, the application process is simplified. The QFI applicant only needs to complete the online forms at the website designated by CSRC, while a PRC custodian bank that has been engaged will submit the application pack to CSRC on behalf of the QFI applicant.

The requisite application materials have also been simplified. For example, the investment plan book, fund source explanation and financial sheets are no longer required. In addition, CSRC’s approval timeline has also been shortened from 20 working days (for QFIIs) and 60 days (for RQFIIs) to 10 working days (for all QFIs).

Expansion of the investment product categories

Although the maximum investment holding in stocks under the QFI Rules remain unchanged, the QFI Rules significantly expand the categories of products in which a QFI is able to invest. Except for the traditional categories of investment products, such as stocks (e.g. A-share), bonds (e.g. fixed income based), financial future contracts and mutual funds, QFIs now can also invest in the following products:

• Securities and shares listed on the National Equities Exchange and Quotations;
• Derivatives relating to bonds, interest rate and foreign exchange traded in the China Inter-bank Bond Market;
• Commodity futures contracts and options traded at the relevant futures exchanges approved by CSRC and
• Private investment funds raised by qualified institutions engaging in securities and futures business and private fund managers which have properly registered with the Asset Management Association of China, provided that the downstream investments made by such private investment funds also fall within the scope of investment products in which a QFI can invest.

It is worth noting that under the QFI Rules, wholly foreign owned private fund managers are expressly permitted to provide investment advisory services to QFIs if they are controlled by that QFI or are under the same control as that QFI.

Legal title of client funds

As with the previous QFII/RQFII regimes, QFIs must open separate securities and futures investment accounts for their proprietary funds and clients’ funds. However, the omnibus client account, named as “QFI+client funds” is not encouraged under the QFI Rules unless it is necessary. If such an account is opened, the QFI will need to disclose the names and details of the assets of the ultimate investors or funds through the custodian banks.

In addition, the QFI Rules have also provided the legal basis for the acknowledgement of the ownership of funds sitting in the relevant investment accounts, i.e. any funds sitting in the investment accounts bearing the names of “QFI+client name”, “QFI+fund name”, or “QFI+client funds” are solely owned by the relevant client or fund and are independent from the funds of QFIs and custodian banks.

No more limits on the number of securities brokers

The previous limits on the number of brokers (i.e. up to three) set out in the QFII/RQFII regimes has been removed from the QFI Rules. This follows the removal of the limits on the number of custodian banks under the SAFE QFI Rules. This lifting will enable QFIs to carry on financial trading based solely on their commercial needs.

Continuous monitoring and disclosure obligations

Although the investment quota requirement has been removed under the SAFE QFI Rules, under the QFI Rules, custodian banks, securities and future companies are still required to continuously monitor the trading activities of QFIs and the status of funds flowing in and out of the QFIs’ account as well as the timely reporting to CSRC, PBOC and SAFE of any irregularities, breaches or non-compliance. Custodian banks are also subject to routine reporting obligations (on a monthly and annual basis) to CSRC with respect to QFIs’ investments.

From a QFI’s perspective, QFIs and their clients may have disclosure requirements if their investments trigger that obligation. In addition, CSRC (subject to regulatory requirements) may also exercise its administrative authority to require QFIs to report information of their overseas hedging positions which are relevant or linked to that QFI’s securities and futures investment in the PRC.

Feasibility on non-trading transfer

In practice, international asset managers may, due to group level commercial requirements (e.g. the necessity to merge multiple funds under management by the same manager), need to carry out non-trading transfers of their invested securities assets. The QFI Rules have now provided this flexibility and feasibility in the following circumstances: (i) any change of the business operating parties which are under the same control; (ii) any adjustment of accounts arrangement by the same QFI; and (iii) any change of managers of fund products or accounts.

Having removed regulatory obstacles and simplified the investment process, the QFI Rules (tougher with the earlier SAFE QFI Rules) have become a new regulatory landmark to attract foreign institutional investments in the Chinese financial markets. We believe that the new QFI regime will serve to stimulate and vitalize the Chinese financial markets and economy.