The Shenzhen Municipal Government issued the Provisional Measures on Shenzhen Pilot Channel for Overseas Investment by Qualified Domestic Investors (hereinafter the “QDIE Measures”) on 8 December 2014. Since then the State Administration of Foreign Exchange (SAFE) has granted Shenzhen two batches of overseas investment quota totaling US$2.5 billion. Additionally, about 40 institutions have been recognized as Overseas Investment Fund Management Enterprises (QDIE Managers).
Based on our experience representing institutions investing overseas via the QDIE Channel, we briefly review its operation.
Major Advantages of the QDIE Channel
Compared with other overseas investment channels, the QDIE Channel has some major advantages:
First, Qualified Domestic Institutional Investor managers are limited to domestic financial institutions and QDLP managers must be contractually connected to a qualified foreign investment management institution. However, QDIE Managers’ controlling investors/general partners or their associated entities may include qualified domestic financial enterprises, equity investment fund management enterprises or foreign investment management enterprises, which is a much broader category compared with QDII and QDLP.
Second, investment through the Overseas Direct Investment Channel is generally limited to industrial projects, investment through the QDII Channel is restricted mainly to financial instruments and QDLP Channel investment is limited to investments in the secondary market, but there is no restriction over investments via the QDIE Channel. QDIE investments can be made in all the categories available to ODI, QDII and QDLP and beyond.
It is noted that the Shenzhen Financial Development Service Office (SFDSO) recommends the continued use of the ODI and QDII Channels for projects which fall within their scope, for instance an investor is using the capital of a group company or shareholder to invest in a single overseas project or in the secondary market.
Also, investors under the ODI and QDLP Channel provisions are limited to enterprises, while overseas investors via the QDIE Channel can be a company, partnership, contractual fund, managed account, trust plan, asset management plan and other forms. Asset management plans managed by fund subsidiaries and trust plans do not need to withhold or remit 25% individual income taxes for their investors.
Moreover, the investment threshold for QDIE is lower than that for QDLP. As to each domestic investor’s subscribed capital, the QDIE Channel requires RMB 2 million whereas the QDLP Channel requires RMB 5 million.
Lastly, overseas investments via QDIE, unlike the ODI Channel, are not required to get approval from the National Development and Reform Commission or commerce authorities, nor required to go through the procedures of foreign exchange registration for overseas investment.
In practice, QDIE Managers submit the required application documents to SFDSO and SAFE at the same time to apply for quota, and then they may conduct purchase and payment of foreign exchange after obtaining approval from SFDSO.
Major Problems of the QDIE Channel
During implementation, QDIE may encounter certain problems.
At this time, QDIE operation is focused on exploring this new method of overseas investment, there is limited quota and therefore the amounts for single projects are also limited.
Currently, a QDIE Manager can apply for 1-3 projects at a time, however the total quota for each QDIE Manager must not exceed US$ 30 million and the total quota is allocated among the projects. The quota is valid for 6 months and will be withdrawn if not used before expiration date. During the quota validity period, if there is still an amount of quota unused after the completion of a certain project and a QDIE Manager intends to apply for a new project, then the manager can request the Joint Meeting Office to cancel the unused quota.
Secondly, the One Bank and Three Commissions (short for “The general headquarters of People's Bank of China, China Securities Regulatory Commission, China Insurance Regulatory Commission, China Banking Regulatory Commission.”) have imposed on financial institutions certain restrictions on the eligibility of overseas investment and the scope of investment. It remains unknown whether financial institutions can use the QDIE Measures to break through these obstacles, such as by subscribing for an asset management plan issued by a QDIE Manager.
From a legal perspective, the QDIE Channel only provides financial institutions with a solution to the purchase and payment quota of overseas investment at the SAFE-level. Financial institutions must still comply with other competent authorities’ restrictions on the eligibility of their overseas investment, the scope of investment and other requirements. Where use of the QDIE Channel may not comply with other controls, it is likely to be investigated by relevant authorities.
Against the background of building Qianhai (short for “Qianhai Shenzhen-Hongkong Modern Service Industry Cooperation Zone”), One Bank and Three Commissions may wish to use the QDIE Measures to promote this pilot window for opening up the financial industry. Financial institutions may be permitted use of the QDIE channel to conduct overseas investment in a less controlled and more flexible manner, however this must be in consultation with relevant authorities on a case-by-case basis. In practice, some financial institutions have already achieved breakthroughs after such consultation.