On September 25, 2020, the China Securities Regulatory Commission (“CSRC”), the People’s Bank of China (“PBOC”) and the State Administration of Foreign Exchange (“SAFE”) jointly issued the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (together with the implementing rules issued by the CSRC, the “New Rules on Investments”), which will come into effect as of November 1, 2020. The New Rules on Investments is aimed at lowering eligibility requirements for QFII/RQFIIs, expanding their investment scopes and further promoting the opening-up of capital markets of China.

 

Back to May 7, 2020, the PBOC and the SAFE jointly issued the Provisions on the Administration of Funds of Qualified Foreign Institutional Investors for Domestic Securities and Futures Investment (the “New Rules on Funds Remittance”), which scrapped restriction on foreign exchange quota and adopted a number of measures to facilitate the operation of funds remittance and profit repatriation.

 

Now, with both the New Rules on Funds Remittance and the New Rules on Investments issued, a new regulatory regime for QFII/RQFII has been established. QFII and RQFII, launched in 2002 and 2011 respectively, have lost their appeal in recent years as affected by such foreign investment channels as Stock Connect, Bond Connect and CIBM Direct, but now will regain the attention and popularity among global institutional investors.

 

We would like to take this opportunity to briefly analyze the benefits brought by the New Rules on Investments, taking into account some questions frequently raised by our clients recently.

 

1. Expansion of Investment Scope

 

In addition to stocks, bonds, stock index futures, public funds and other investable products, the New Rules on Investments also permits QFII/RQFIIs to invest in securities listed on National Equities Exchange and Quotations (“NEEQ”), private funds, financial futures other than stock index futures, commodity futures, options, etc. Further, it allows QFII/RQFII to participate in bond repurchases, margin trading and securities lending on stock exchanges and securities lending to securities finance company.

 

The investment scope of QFII/RQFII can be divided into three categories, as detailed in the table below.

 

Category	Permitted Investment Scope
Category 1	QFII/RQFII may invest in the following financial instruments: stocks, depository receipts, bonds, bond repurchases and asset-backed securities traded or transferred on stock exchanges; stocks and other types of securities transferred on the NEEQ; products and derivatives on bond, interest rates and foreign exchange traded in the interbank bond market which are deemed by the PBOC as eligible for QFII/RQFII; public funds; financial futures listed and traded on the China Financial Futures Exchange; commodity futures listed and traded on futures exchanges approved by the CSRC; options listed and traded on exchanges approved by the State Council or the CSRC; foreign exchange derivatives traded for hedging purposes which are deemed by the SAFE as eligible for QFII/RQFII; other financial instruments as approved by the CSRC.
Category 2	QFII/RQFII can participate in the subscription for new share issuance, bond issuance, asset-backed securities issuance, secondary share offerings and share allocations on stock exchanges and the NEEQ. QFII/RQFII can also engage in margin trading and securities lending on stock exchanges and securities lending to securities finance company.
Category 3	QFII/RQFII may invest in private funds, but the scope of investment of such private funds shall fall under Category 1 and Category 2.

 

With regard to some investments, please kindly note:

 

1. Private Securities Investment Fund

 

QFII/RQFIIs may invest in private securities investment funds, but the scope of investment of such funds is limited to Category 1 and Category 2 as listed in the table above. After the implementation of New Rules on Investments, QFII/RQFIIs will become an important source of funds for private securities investment funds.

 

As of today, there are 30 foreign asset managers that established wholly foreign-owned private securities investment fund managers (“WFOE PFM”) in the PRC. This breakthrough is particularly important for WFOE PFM. Considering that WFOE PFM is not familiar with the domestic market, has not established a sound distribution channel, and has not built its own track record in domestic securities and futures investment, such improvement may help WFOE PFM obtain seed capital from its affiliated QFII/RQFII when launching a private fund.

 

2. Private Asset Management Products

 

The New Rules on Investments explicitly permits QFII/RQFII to invest in private asset management products issued by public fund management companies (“FMC”), securities companies, futures companies and their asset management subsidiaries as long as the investment scope of such private asset management product falls into Category 1 and Category 2 as set forth in the table above.

 

We noticed that, the currently effective rules allow QFII/RQFIIs to entrust asset managers such as FMCs to manage their domestic securities investments, but such provision is deleted in the New Rules on Investments. Under this circumstance, FMCs may set up a targeted client asset management product (i.e., a one-to-one mandate product) for QFII/RQFIIs so as to manage the onshore securities and futures investment of QFII/RQFIIs.

 

3. Asset Management Products not Subject to Regulation of the CSRC

 

QFII/RQFIIs shall not invest in asset management products such as trust schemes, insurance asset management products, and wealth management products (WMPs, including retail and private WMPs), etc. which are not subject to the regulation by the CSRC.

 

4. Derivatives

 

The specific trading varieties and methods that QFII/RQFIIs are allowed to participate in, such as financial derivatives, will be opened up step by step in a steady and orderly manner, and will be announced upon consultation with the PBOC and the SAFE by the CSRC.

 

Except for foreign exchange derivatives, there is no clear requirement that other derivatives shall be invested solely for hedging purpose, leaving room for the utilization of investment strategies other than hedging. It remains to be seen how the regulators will “gradually open” the derivatives market.

 

In addition, the New Rules on Investments provides that the CSRC may, based on regulatory needs, require QFII/RQFII to report information such as hedging transaction positions made overseas relating to its domestic securities and futures investments.

 

2. PFMs to Provide Investment Advisory Services for Affiliated QFII/RQFIIs

 

The New Rules on Investments allows QFII/RQFIIs to entrust domestic PFMs controlled by it or under the common control to provide investment advisory services.

 

The New Rules on Investments will bring new business opportunities to the WFOE PFMs. Most of the foreign asset managers with onshore WFOE PFMs have a strong demand for such business.

 

In addition, many PRC-headquartered QFIIs/RQFIIs may also have affiliates registered as PFMs in the PRC. So, the New Rules on Investments will also help these QFIIs/RQFIIs make full use of relevant resources within their group.

 

3. Eligibility Requirements Lowered

 

The New Rules on Investments removed the quantitative indicator requirements in respect of the length of business operation and asset scale of QFII/RQFII applicants, but retained the compliance requirements such as having stable financial conditions, good credit standing, experience in securities and futures investments as well as corporate governance structure, internal control and compliance management.

 

Qualified small and medium-sized foreign institutional investors will also have the opportunity to invest in the PRC securities and futures market.

 

4. Opportunities for Hedge Fund Managers and Alternative Asset Managers

 

Foreign fund management companies, commercial banks, insurance companies, securities companies, futures companies, trust companies, governmental investment institutions, sovereign funds, pension funds, charitable funds, endowment funds, international organizations and other institutions recognized by the CSRC may apply for the QFII/RQFII license. Further, we noticed that the New Rules on Investments deleted the provisions on giving priority to pension funds, insurance funds, mutual funds, charitable funds and other long-term asset managers.

 

In our opinion, this will attract more foreign hedge fund managers and alternative asset managers with experience in investing in securities and futures to apply for the QFII/RQFII license.

 

5. QFII and RQFII Regime Unified

 

The New Rules on Investments unifies QFII scheme and RQFII scheme into one. The applicants are no longer required to apply for QFII and RQFII licenses separately and may engage in QFII and RQFII businesses simultaneously upon approval of just one application. Previously, the restrictions imposed on RQFII pilot countries and regions were already cancelled in October 2019.

 

6. Approval Procedure Simplified

 

The New Rules on Investments greatly simplified the requirements for the submission of application documents to the CSRC through custodians. In addition, the applicant should fill in the application form online through the CSRC website and submit the relevant information. In this regard, the CSRC simultaneously updated its guidelines.

 

The examination and approval period is shortened to 10 business days, starting from the date of acceptance of the application.

 

7. Concerns of Foreign Institutions Resolved

 

To be consistent with the New Rules on Funds Remittance, the following provision in the previous consultation paper was also removed from the New Rules on Investments: “The PBOC and the SAFE may, based on the economic and financial situations, the supply and demand in the foreign exchange market and the balance of international payments, carry out macro and prudential management of the capital remittance and repatriation by the QFII/RQFII.”

 

Such adjustment will resolve QFII/RQFII’s concerns about the profit repatriation.

 

8. Limits on the Number of Brokers Scrapped

 

The New Rules on Funds Remittance has scrapped the limits on the number of custodians that a QFII/RQFII may appoint, and the New Rules on Investments now scraped the limits on the number of securities company and futures company a QFII/RQFII may entrust to conduct investment of securities, future, options, etc. This will help foreign asset managers ensure the best execution for their clients and funds in accordance with foreign regulatory rules and industry practices.

 

9. Ownership Limit and Information Disclosure

 

The New Rules on Investments has generally retained the 10% and 30% ownership limit (not applicable to strategic investments), and made some further input.

 

	Previous Regulation	New Rules on Investments
10%	The shareholding of a single QFII/RQFII must not exceed 10% of the total shares of an exchange-listed company	The shareholding of a single QFII/RQFII or any other foreign investor must not exceed 10% of the total shares of an exchange-listed or a NEEQ-admitted company
30%	The aggregate shareholding of all QFII/RQFIIs must not exceed 30% of the total shares of an exchange-listed company	The aggregate shareholding of all QFII/RQFIIs and other foreign investors must not exceed 30% of the total shares of an exchange-listed or a NEEQ-admitted company

 

In addition to the input related to NEEQ stocks, such provision in the New Rules on Investments is aimed to emphasize that the 10% and 30% ownership limit shall be followed, no matter whether it is investment to A-share or NEEQ stocks through such regime as Stock Connect or through QFII/RQFII. Such provision is consistent with current regulatory policies.

 

Regarding the information disclosure, the New Rules on Investments generally retains current regulatory rules.

 

On the one hand, with regard to information disclosure, a QFII/RQFII is obliged to aggregate the interests of its shareholding in a company, including the company’s shares listed or admitted in the domestic markets and foreign shares listed overseas, and comply with relevant information disclosure rules. A QFII/RQFII shall disclose relevant securities investments of persons acting in concert according to information disclosure rules.

 

On the other hand, where a foreign investor’s domestic securities investment under the name of a QFII/RQFII triggers a disclosure obligation, the foreign investor shall, as the obligor of information disclosure, submit the disclosure documents to the trading venues through the QFII/RQFII. A QFII/RQFII shall have full knowledge of the domestic securities positions of the foreign investors under its name, and is obliged to urge such foreign investors to strictly comply with relevant information disclosure rules.

 

10. Non-trade Transfer

 

In practice, in some scenarios (e.g., where a foreign asset manager has decided to merge two funds under its management), it is reasonable for foreign asset managers to apply for non-trade transfer of the securities and futures invested by relevant funds.

 

Now, it is provided in the New Rules on Investments that when a QFII/RQFII acts to improve investment and operation efficiency or to streamline account structure through the means of transferring its qualification to another entity under the same control, rearranging its own accounts, or changing managers of its fund products or accounts, the QFII/RQFII may file for a non-trade transfer according to rules issued by the securities depository and clearing institutions and the stock exchanges.

 

It is certainly a positive development for foreign asset managers.

 

11. Securities and Futures Account

 

QFII/RQFII shall apply for separate securities and futures accounts for proprietary and client funds respectively.

 

1. Proprietary Funds

 

The account invested with proprietary funds shall be named in the format of “QFII/RQFII  +  Proprietary Funds”.

 

2. Client Funds

 

The account invested with client funds under management shall be named in the format of “QFII/RQFII + Client Name” or “QFII/RQFII + Fund Name”; for any account deemed necessary to be named “QFII/RQFII + Client Funds”, QFII/RQFII shall, in accordance with the rules of securities depository and clearing institutions and the futures market monitoring institutions, report via the custodian relevant account information such as names of investors or funds and assets under custody.

 

Foreign asset managers attach importance to fund assets segregation, and usually engage a PRC lawyer to issue legal opinion on such issue. For example, the management company, the investment manager (usually QFII/RQFII license holder), the depositary/trustee and the sub-custodian (including the PRC custodian) of a UCITS usually tend to clarify such issue in relevant custodian/sub-custodian agreement.

 

CSRC has clarified such issue in a press release years ago. Now, it is provided in the New Rules on Investments directly that the ownership of the assets in the abovementioned accounts belong to the corresponding client or fund, and shall be kept independent of the assets of QFII/RQFII and the custodian.

 

12. Afterword

 

With the New Rules on Fund Remittance and the New Rules on Investments issued successively, restriction on foreign exchange quota is scrapped; the procedure on profit repatriation is simplified, and the investment scope is extended. This round of reform on QFII/RQFII has completed.

 

After the reform on QFII/RQFII, the reform on opening up of bonds markets is currently under way. QFII/RQFII will be more attractive to foreign investors when the three ways of entering into bonds markets in China (i.e., CIBM Direct, Bond Connect and QFII/RQFII) are further aligned.

 

Chinese capital market has become more and more mature, and we expect more exciting developments in the near future.

 

 

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Please kindly note that this Memo is rendered mainly with respect to relevant laws and regulations of the PRC (for purposes of this Memo only, the PRC does not include Hong Kong, Taiwan or Macau) in effect as of the date of this Memo. This Memo is being furnished solely to you on a confidential basis for your reference purposes only.

 

Jingtian & Gongcheng Investment Funds & Asset Management Group has vast experience with asset management business in China, including cross-border asset management business (e.g., QFII, RQFII, QDII, RQDII, QDLP, QDIE, QFLP, RQFLP, Stock Connect, CIBM Direct, Bond Connect and MRF).

 

In September 2019 and March 2020, Jingtian & Gongcheng received international recognition by garnering the China Investment Fund Law Firm of the Year Award from China Law & Practice and Asia Firm of the Year from The Asian Lawyer under leading international legal publishing group ALM, respectively.

 

Should you have any further questions, please feel free to contact Messrs. James Yong Wang and Eric Ye Zou below.