Following the recent expansion of the total investment quota for Renminbi Qualified Foreign Institutional Investor ("RQFII") from RMB20 billion to RMB270 billion on March 1, 2013, the China Securities Regulatory Commission (the "CSRC"), the People’s Bank of China (the "PBOC") and the State Administration of Foreign Exchange (the "SAFE") jointly issued The Pilot Measures on Securities Investment in Mainland China by Renminbi Qualified Foreign Institutional Investors (the "New RQFII Measures"). The CSRC, on the same day, issued The Provisions on the Implementation of the Pilot Measures on Securities Investment in Mainland China by Renminbi Qualified Foreign Institutional Investors (the "New RQFII Provisions" together with the New RQFII Measures, the "New RQFII Regulations"). The New RQFII Regulations replaced the two previous regulations on RQFII program issued in late 2011 (the "Old RQFII Regulations") with several significant changes. Major changes include the expansion of scope of RQFII applicants, the relaxation of the source of RMB funds, simplified application documents, and the expansion of permissible investments by RQFIIs. This article will briefly summarize the aforementioned major changes brought by the New RQFII Regulations.
I. EXPANSION OF SCOPE OF RQFII APPLICANTS
Under the Old RQFII Regulations, only Hong Kong-incorporated subsidiaries of an asset management company, and a securities company registered in Mainland China, were eligible to apply for a RQFII license and investment quota. In addition to the above, the New RQFII Regulations allow more entities to engage in the RQFII program, which include (i) Hong Kong subsidiaries of commercial banks and insurance companies registered in Mainland China; and (ii) financial institutions registered in Hong Kong and which have their principal business in Hong Kong (together referred to as "Eligible Entities"). The Eligible Entities are also required to hold a license from Hong Kong’s securities regulatory authority for conducting asset management business and have already been engaged in the asset management business. Further to expanding the scope of Eligible Entities for the RQFII program, the New RQFII Regulations also relax certain requirements for the Eligible Entities. For example, the New RQFII Regulations stipulate that an Eligible Entity must not have been subject to any serious punishment by local regulatory authorities over the past three years or since its establishment. Therefore, an Eligible Entity is not required to have been established for three years when making the application for RQFII license. The expansion of scope of Eligible Entities is expected to attract more applicants for the RQFII program, especially overseas financial institutions in Hong Kong, which were excluded under the Old RQFII Regulations.
II. RELAXATION OF SOURCE OF RMB FUNDS
The Old RQFII Regulations only allowed Hong Kong-incorporated subsidiaries of an asset management company and a securities company registered in Mainland China to use "funds raised in Hong Kong" to invest in the securities market in Mainland China. Under the New RQFII Regulations, such restriction has been abolished and RMB funds "raised outside of Mainland China" can be used for investment in the securities market in Mainland China.
III. SIMPLIFIED APPLICATION DOCUMENTS
The New RQFII Regulations simplify the application documents required for an RQFII applicant to submit to the authority. The following application documents are no longer required under the New RQFII Regulations:
- a statement on whether the applicant’s parent company in Mainland China has been subject to any serious punishment by local regulatory authorities over the past three years;
- a statement on the internal control system of the applicant; and
- a legal opinion.
The draft custodian agreement between a RQFII applicant and its custodian as required under the Old RQFII Regulations has been replaced by the power of attorney to the custodian as required under the New RQFII Regulations.
IV. EXPANSION OF PERMISSIBLE INVESTMENTS
The New QFII Regulations expand the scope of permissible investment products to include the following:
- stocks, bonds, and warrants traded or transferred in the securities exchanges (Shanghai and Shenzhen Securities Exchanges);
- fixed-income products traded on the interbank bond market;
- securities investment funds;
- stock-index futures; and
- other financial instruments permitted by the CSRC.
Under the Old RQFII Regulations, an RQFII was required to invest no less than 80% of the approved investment quota in fixed-income products including various types of bonds and fixed-income funds and no more than 20% of the approved investment quota in stocks and equity-type funds. Such restriction is now eliminated by the New RQFII Regulations. It will give RQFIIs a free hand to invest in the products listed above.
In addition to the above, the New RQFII Regulations provide that the maximum aggregate amount of shareholding of all foreign investors in a single A-shares listed company is 30% and the maximum aggregate amount of shareholding of a single foreign investor in a single listed company is 10%. However, such restriction is not applicable to foreign investors who make strategic investments in listed companies under The Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors.
In general, the New RQFII Regulations reflect efforts by China’s regulators to promote the internationalization of the RMB and are expected to attract more foreign investors to invest in China’s capital markets. We have heard news that the regulators are considering extending the RQFII program to entities in Taiwan, but no details were available at the time this article was published.