Quick Read

Details of the long awaited mini-QFII or RQFII scheme were finally announced on 16 December 2011.

The new rules permit Hong Kong subsidiaries of fund management and securities companies in the People's Republic of China ("PRC") to apply for quotas to use renminbi ("RMB") funds raised in Hong Kong to invest in the PRC securities market.

The first successful batch of applicants announced their approvals on 22 December 2011.


The Qualified Foreign Institutional Investors ("QFII") scheme is a program which was launched in 2002 in PRC to allow authorised foreign institutional investors to invest in the PRC securities market with the approval of the China Securities Regulatory Commission ("CSRC") through a quota granted by the State Administration of Foreign Exchange ("SAFE").

Under the QFII scheme, an authorised foreign institutional investor is permitted to convert foreign currency into RMB to invest in PRC securities.

For more details of the QFII scheme, please refer to our previous Legal Update entitled "China's New QFII Regulations Released".

RQFII refers to RMB Qualified Foreign Institutional Investors. The RQFII scheme is effectively an RMB-settled version of the pre-existing QFII scheme which is foreign-currency settled. Under the RQFII scheme, authorised entities, being those with the approval of CSRC through a quota granted by SAFE, are allowed to use RMB funds raised in Hong Kong to invest in the PRC securities market.

The two schemes are intended to run hand in hand with each other with separate quotas being allocated.

RQFII Qualifying Conditions

The "Rules on Pilot Scheme on Investment in PRC Securities by Renminbi Qualified Foreign Institutional Investors of Fund Management and Securities Companies" (<基金管理公司、證券公司人民幣合格境外機構投資者境內證券投資試點辦法>) ("RQFII Rules") were announced jointly by CSRC, SAFE and the People's Bank of China ("PBoC") on 16 December 2011. The relevant implementation rules of the RQFII Rules were also announced by CSRC on the same day.

The RQFII Rules permit Hong Kong subsidiaries ("HK Subsidiaries") of qualified PRC fund management and securities companies, as pilot institutions, to use funds raised in RMB in Hong Kong to invest in the PRC securities market. HK Subsidiaries are required to satisfy certain conditions in order to qualify for a quota under the RQFII scheme:

  • the Parent company and its HK Subsidiary must be licensed to undertake asset management business (i.e. the HK Subsidiary must have a Type 9 licence from the Hong Kong securities regulatory authority, the Securities and Futures Commission);
  • the HK Subsidiary must be financially stable with a satisfactory credit standing;
  • the HK Subsidiary must have effective corporate governance and internal control procedures and its employees must have the necessary professional qualifications as required in Hong Kong;
  • the Parent company and its HK Subsidiary must be in compliance with all relevant regulations in relation to their businesses and have not been subject to any material punishment by local regulatory agencies during the three years prior to the application; and
  • such other conditions as CSRC may stipulate.

Permitted Investments in Domestic Securities in the PRC

The RQFII scheme is subject to a quota and the initial quota is reported to be approximately RMB20 billion (over US$3 billion) in total.

The RQFIIs may invest in RMB financial instruments i.e. stocks, bonds, warrants, securities investment funds that are listed and traded in securities exchange and other financial instruments permitted by CSRC and PBoC. In addition, RQFIIs can purchase newly issued shares following an initial public offering ("IPO"), convertible bonds and shares offered after the IPO to the public or to the original shareholders.

As a risk control measure and to develop the fixed income market for debt securities, at least 80% of the RMB funds invested by a RQFII must be invested in fixed income securities such as bonds and fixed income funds and only 20% of the RMB funds can be invested in equities, such as A shares, and equities funds in the PRC.

Similar to the RQFII scheme, qualified investors under the QFII scheme are allowed to invest in RMB financial instruments such as listed stocks, treasury bonds, corporate debentures and convertible bonds and other financial instruments recognised by CSRC.

In short, the RQFII scheme encourages investment into PRC debt securities and caps the amount of investment into PRC equity securities while the QFII scheme has no such investment limits.

Subsequent to the issuance of the RQFII Rules, SAFE published a Circular on Issues Concerning Pilot Scheme on Investment in PRC Securities by Renminbi Qualified Foreign Institutional Investors of Fund Management and Securities Companies (the "Circular") on 23 December 2011 setting out a limited amount of additional information.

The Circular provides that each time a RQFII remits RMB funds to an account opened with its custodian, its investment quota will be reduced by such amount. The Circular also contains 'use it or lose it' wording. The unused portion of a RQFII's quota will be cancelled on the anniversary of the date on which the quota is given.

Whereas under the QFII scheme, the originally approved quota is adjusted at the end of the investment period to equal the amount that has been actually remitted, or cancelled if such amount is lower than USD 20 million. In the case of open-ended China funds (as defined), there is a special rule that the difference between the quota and the net capital in the custodian's account after redemption can be re-used by the fund.

Various other issues such as lock up periods and whether there will be concessions granted for RMB raised in Hong Kong by open ended funds, as is the case under the QFII scheme, are not addressed by the RQFII Rules. In this regard, further regulations may be expected.

Facilitating Hong Kong as an Offshore RMB Business Centre

Our previous Legal Update entitled "New Ways to Use Your Offshore RMB: MOFCOM and PBoC Join Hands to Put Finishing Touches on RMB FDI Rules" already discussed the rules announced by the PRC Ministry of Commerce and PBoC in October 2011 ("FDI Rules") to provide more investment channels for the pool of RMB funds in Hong Kong. It is widely believed that such rules would expedite the development of offshore RMB business in Hong Kong.

The FDI Rules and RQFII Rules provide another means for deploying offshore RMB and we expect they will be seen as further steps towards full-convertibility of the currency.

It is anticipated that the RQFII Rules will further facilitate the circulation of onshore and offshore RMB funds and thus are another important milestone on the path of RMB's internationalisation. The RQFII Rules will encourage the launch of a wider variety of RMB investment products in Hong Kong. These investment products will allow those holding offshore RMB to enjoy yield enhancement alternatives to bank deposits. For example, SFC authorised RMB bond funds managed by HK Subsidiaries. Under the RQFII Rules, SFC authorised RMB bond funds managed by HK Subsidiaries can now make cross border investments i.e. in onshore RMB bonds, instead of being limited to investments in 'dim sum' bonds in Hong Kong.

You can download copies of the RQFII Rules via the link below (in Chinese only): http://reaction.mayerbrown.com/rs/ct.aspx?ct=24F76B1DD6EB0AEDC1D180AED22C921CD9BE4C98F8B42FF67ADE0201429

You can download copies of the relevant implementation rules via the link below (in Chinese only): http://reaction.mayerbrown.com/rs/ct.aspx?ct=24F76B1DD6EB0AEDC1D180AED22C921CD9BE4C98F8B42FF67ADE0202425