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Cross-border Investment Channels in China (QDII/RQDII/QFII/RQFII/QFLP Regimes)
Source: | Author:SiennaCorp | Publish time: 2020-04-14 | 40 Views | Share:
I.    Introduction:

 

As China’s economy transitions from a planned economy to a market economy, the rapid economic growth over the past three decades has strengthened the China’s participation in the global economy and witnessed the gradual opening-up in China’s capital markets.

 

In November 2002, the China Securities Regulatory Commission (“CSRC”) and the People’s Bank of China (“PBC”) first introduced the Qualified Foreign Institutional Investor (“QFII”) regime to enable foreign investors to invest in China’s securities market within quota limits.

 

In April 2006, the Qualified Domestic Institutional Investor (“QDII”) regime was launched, which works in an opposite way of the QFII regime. It allows domestic investors authorised by the CSRC to invest in overseas capital markets under the foreign exchange control of China’s State Administration of Foreign Exchange (“SAFE”).

 

To provide foreign investors a new channel to access China’s unlisted equity market, rather than securities market, the initial Qualified Foreign Limited Partnership (“QFLP”) pilot programme was launched in Shanghai in 2010. The QFLP regime allows foreign investors to form an onshore RMB fund by raising money from both domestic and foreign investors and then invest in private companies. Subsequently, other QFLP pilot programmes were also introduced in Beijing, Shenzhen, Chongqing, Qingdao, Guangzhou, Zhuhai and other cities.

 

In August 2011, the Renminbi Qualified Foreign Institutional Investor (“RQFII”) regime, a modified version of the QFII regime, was launched to facilitate the access to offshore RMB to invest in the China’s securities market.

 

Likewise, the Renminbi Qualified Domestic Institutional Investor (“RQDII”) regime was launched in November 2014, which permits domestic investors to invest in overseas RMB-denominated products using their own RMB funds or RMB funds raised from the domestic institutional or individual investors.


 


It is important to note that the SAFE has announced that the investment quota limits on the QFII and RQFII regimes would, upon approval by the State Council, be abolished. The SAFE also published draft rules that would combine the current QFII and RQFII regimes together; thus, simplifying access for foreign investors to China’s bond and stock markets.

 

The conspicuous trend of continuous opening-up in China’s financial industry not only lays the necessary foundation for business expansion by domestic players, but also attracts more overseas financial investors to enter the markets in China. The government’s supervision on China’s capital markets, however, is still relatively restrained due to the remaining influence of China’s planned economy. Therefore, how to legitimately allocate overseas capital through a cross-border investment shall be cautiously explored.

 

This document introduces two aspects of the opening-up of China’s capital markets in a subsequent order. One is outbound access, including the QDII and RQDII regimes, which allows domestic investors to join global capital markets; the other is inbound access, including the QFII, RQFII and QFLP regimes, which allows foreign investors to enter China’s capital markets.

 

 

II.    Outbound Access to the International Market:

 

For the purpose of this session, “outbound access” refers to access by onshore investors to offshore financial products.

 

A.   QDII:

 

1.    Overview:

 

The QDII regime was first established in 2006 with the issuance of the Notice of CSRC on the Issues concerning the Implementation of the Pilot Rules on the Administration of Overseas Securities Investment by QDIIs (“Notice”), initially setting forth the pilot that allowing domestic institutional investors to raise funds in the mainland, then purchase foreign exchange, and invest in offshore capital market under the control of the SAFE.

 

2.    QDII Approval Procedures:

 

All participants in the QDII regime are required to obtain a QDII licence from the CSRC. An applicant shall submit required documents to the CSRC to apply for the QDII qualification. In the case of approval, the CSRC shall issue a licensing document.

 

To apply for the QDII qualification, an applicant shall meet the requirements pursuant to Article 5[1], Article 6[2], and Article 7[3] of Trial Measures for the Administration of Overseas Securities Investment by QDII issued in 2007 (“Trial Measures”).

 

A QDII then may submit documents for a product raising application to the CSRC and wait for its decision.

 

A QDII shall also apply to the SAFE for the foreign exchange business qualification, and a quota shall be granted by SAFE as the first step of overseas investment.

 

3.    Asset Custody:

 

When a QDII engages in the overseas securities investment business, there shall be a bank with a securities investment fund custody qualification (“custodian”) to take charge of the asset custody. As for the overseas assets of a fund or pool plan, a custodian may entrust an overseas custodian to perform the duty for the trustee on its behalf. In case the overseas custodian causes any loss to the assets of a fund or pool plan due to its fault or negligence, during the process of performing duties, the custodian shall assume corresponding liabilities.

 

4.    Capital Raising and Investment Operation:

 

A fund management company that has obtained the QDII qualification may raise the capital by publicly selling fund units according to relevant laws and regulations, and invest fund assets in the overseas securities market.

 

A securities company that has obtained the QDII qualification may raise the capital by establishing a pool plan, and invest the capital it raised in the overseas securities market.

A fund or pool plan shall be used to invest in the financial products or tools prescribed by the CSRC in the Notice[4], and abide by the provisions on the proportion of investment.

 

Except as otherwise provided for by the CSRC, a fund or pool fund shall not have the following conduct:

 

a.     Purchasing a real estate;

b.     Purchasing a real estate mortgage;

c.     Purchasing precious metals or receipts representing precious metals;

d.     Purchasing commodities in kind;

e.     Borrowing funds except for such interim purposes as due payments for redemption and transaction settlement. The ratio of funds borrowed for an interim purpose shall not exceed 10% of the net asset value of a fund or pool fund;

f.      Purchasing securities by financing, except investment in financial derivatives;

g.     Participating in short selling without holding the underlying assets;

h.     Engaging in securities underwriting business;

i.      Any other conduct prohibited by the CSRC.

 

5.    Quota and Capital Management:

 

Provisions on the Foreign Exchange Administration of Overseas Securities Investment of QDIIs issued in 2013 specifies administration on investment quota as following:

 

·         A QDII shall set reasonable upper limits of the quota and the scale in the raising scheme according to the market conditions and the characteristics of the product, report them to the SAFE for archival filing, and go through pertinent formalities at the SAFE according to legal provisions, and regularly report the use of its quota as well as the outward and inward remittance of capital to the SAFE;

 

·         The SAFE applies balance management to investment quotas, and the net amount of capital (including foreign exchange and RMB capital) remitted outward by a QDII for overseas investment may not exceed its approved investment quota;

 

·         Where the capital remitted outward or inward by a QDII is not in U.S. dollar, the equivalent value in U.S. dollar of the QDII's investment quota shall be calculated according to the table of conversion rates between U.S. dollar and other currencies published by the SAFE in the month when the outward or inward remittance occurs;

 

·         Where a QDII with an investment quota has failed to effectively use its investment quota within two years, the SAFE shall have the authority to reduce its investment quota;

 

·         No QDII may transfer or sell its investment quota.

 

B.    RQDII:

 

1.    Overview:

 

The RQDII regime, established in 2014, broadens the channels for the two-way flow of RMB capital at home and abroad and facilitates the overseas securities investment activities of RQDIIs.

 

China’s Central Bank, in 2018, updated rules on the RQDII regime that allows domestic institutional investors to buy RMB-denominated products in overseas markets. The RMB funds, however, must not be converted into foreign currencies under the regime for overseas investment.

 

The People’s Bank of China (PBC) published the notice on its website mentioning that a RQDII shall, as required, report basic information including the sources and scale of funds, investment plans, outward and inward remittance of funds and their overseas positions to the Shanghai Head Office of the PBC.

 

2.    Key Requirements and Differences:

 

RQDII

QDII

Approval Procedures

RQDII qualification issued by the financial regulatory authority under the State Council

QDII qualification issued by the CSRC

foreign exchange business qualification issued by the SAFE

Issuance of Product

RQDII may increase the maximum issuance scale of a product according to the actual fund-raising situation.

QDII shall submit documents to the CSRC for a product raising application and wait for the decision of approval or disapproval from the CSRC.

Asset Custody

A domestic custodian bank may open a domestic RMB custody account for each product of a RQDII, and shall open overseas RMB custody accounts with an overseas custodian for the relevant products of a RQDII.

A bank with a securities investment fund custody qualification (“custodian”) shall take charge of the asset custody for a QDII. A custodian may entrust an overseas custodian to perform the duty for the trustee on its behalf.

Capital Raising

A RQDII may make investment in the RMB-denominated products on overseas financial markets with their own RMB funds or RMB funds raised from domestic institutions and individuals (excluding overseas utilization of banks' self-owned funds).

fund management company -- sell fund units;
securities company -- establish a pool plan;
A fund and pool plan shall be used to invest in financial products or tools prescribed by the CSRC.

Investment Operation (Prohibitive Provisions)

A RQDII making overseas investment shall NOT remit RMB funds abroad for purchase of foreign exchange.

A fund or pool fund shall NOT be used to purchase a real estate and engage in other conducts prescribed by the CSRC.

Quota and Capital Management

The scale of the overseas investment funds remitted by a RQDII shall be subject to the actual fundraising scale and shall NOT exceed the maximum issuance scale reported thereby to the financial regulatory authority under the State Council.

The SAFE applies, balance management to investment quotas, and the net amount of capital (including foreign exchange and RMB capital) remitted outward by a QDII for overseas investment may NOT exceed its approved investment quota.

 

III.   Inbound Access to the PRC market:

 

For the purpose of this session, “inbound access” refers to access by offshore investors to onshore stock and bond markets.

 

A.   QFII/RQFII:

 

1.    Overview:

 

The QFII regime was the first cross-border investment channel introduced by the CSRC and PBC to enable foreign investors to invest in China’s securities market within quota limits.

 

In September 2019, upon approval by the State Council, the SAFE announced to remove the investment quota restrictions for both the QFII and RQFII regimes to boost financial reforms and opening-up.[5] The removal of quota limitations will make it much more convenient for overseas investors to participate in China’s domestic financial markets and attract more capital inflows into China.

 

The SAFE also published draft rules that would combine the QFII and RQFII regimes while also simplifying access for overseas investors.

2.    Key Requirements and Amendments:

 

Amendments

QFII

RQFII

New Rules on Draft Version of Provisions

Eligibility Criteria for Participants

Explicitly stipulated requirements on: (i) years of experience; (ii) the amount of assets securities under its management; or (iii) the amount of net assets held by it in the last fiscal year

HK (or overseas) subsidiary of a domestic fund management company, securities company, commercial bank, or insurance company

No explicitly quantitive requirements for applicants

Application Procedures

(i) QFII qualification application: at least 10 required documents submitted to the CSRC
(ii) an investment quota application: the SAFE;
(iii) 20 workdays for CSRC and SAFE to make a decision

(i) RQFII qualification application: at least 9 required documents submitted to the CSRC;
(ii) an investment quota application: the SAFE;
(iii) 60 workdays for CSRC and SAFE to make a decision

(i) 7 documents required to submit to the CSRC to apply for a qualification;
(ii) an investment quota application: the SAFE;
(iii) 20 workdays for CSRC and SAFE to make a decision

Investment Scope

(i) stocks, bonds and warrants;
(ii) fixed-return products;
(iii) securities investment funds;
(iv) stock index futures; and
(v) other RMB financial instruments permitted by the CSRC

(i) stocks, bonds and warrants;
(ii) fixed-income products;
(iii) securities investment funds; (iv) stock index futures; and
(v) other RMB financial instruments permitted by the CSRC

other investment instruments:
(i) stocks listed on “the new three board";
(ii) bond repurchase;
(iii) private equity funds;
(iv) financial futures;
(v) commodity futures;
(iv) options.

Asset Custody

(i) The qualification of trustee may be obtained upon the approval of the CSRC and the SAFE;
(ii) Each QFII may ONLY entrust ONE trustee and may change the trustee.

An RQFII shall submit a formal custody agreement to the CSRC.

(i) The trustee shall, within 5 workdays after signing up the custody agreement, submit the agreement to the CSRC for record;
(ii) Any investor may entrust more than 2 trustees.

Supervision and Administration

No mandatory provisions, but the CSRC and the SAFE may make necessary inquiries and examinations.

No mandatory provisions, but the CSRC and the SAFE may make necessary inquiries and examinations.

An investor shall:
(i) apply for opening a securities account, and entrust the institution that has obtained the qualification to conduct capital settlement;
(ii) apply for opening individual securities and futures accounts for its own capital and client's funds under its management;
(iii) make an appointment of inspector.

Information Disclosure

No regular report obligation and transmission management requirement

No regular report obligation and transmission management requirement

(i) regularly report to the CSRC;
(ii) transmission management that sets restriction of shareholding percentage

 

B.    QFLP:

 

1.    Overview:

 

The QFLP regime serves as an important channel for pilot enterprises to participate in investments in non-publicly traded company equities. Generally, pilot enterprises include foreign-funded equity investment management enterprises (“FEIME”) and foreign-funded equity investment enterprises (“FEIE”).

 

To be more specific, FEIMEs refer to enterprises that are legally established by offshore enterprises or individuals and whose principal business is to initiate the establishment of equity investment enterprises, or to be entrusted to manage equity investments; FEIEs refer to enterprises that are legally established by offshore enterprises or individuals to raise funds from both domestic and foreign investors through non-public means and whose principal business is to invest in the equities of non-publicly traded companies.

 

Under the QFLP regime, pilot enterprises enjoy a more efficient foreign exchange treatment that they are allowed to convert their foreign currency capital into RMB up to the quota at the fund level as capital contributions to RMB funds, and therefore investments proceeds may be paid in RMB as well, compared with other foreign-invested enterprises at the policy level, which is considered as the main advantage of the QFLP regime.

 

In this session, we provide some useful information on relative differences in terms of the design and implementation of policies of four pilot programmes in Shanghai, Shenzhen, Zhuhai and Guangzhou, which may be taken into consideration when deciding where to apply for the QFLP pilot qualification.

Note that Guangzhou is the first city whose pilot programme has not adopted the recognition of enterprises qualification. Except that FEIMEs and FEIEs adopting the business form of company shall file relevant information with the Ministry of Commerce in accordance with the Interim Measures for the Recordation Administration of the Formation and Modification of Foreign-Funded Enterprises, the establishment, registration, and filing requirements for FEIMEs and FEIEs are almost same as those for domestic-funded equity investment enterprises and domestic-funded equity investment management enterprises.

 

2.     Four QFLP Pilot Programmes:

 

a.    FEIMEs:

 

Shanghai

Shenzhen

Zhuhai

Guangzhou

Business Form

company or partnership

Unspecified

Capital Contribution

The registered capital (or subscribed capital) shall not be less than $2 million.

No minimum contribution requirement, ratio requirement of initial capital contribution, time limit on contribution, and other restrictions of capital contribution.

At least 20% shall be paid up within 3 months from the date of issuance of its business license, and the remaining shall be paid up within 2 years.

At least 20% shall be paid up within 3 months from the date of issuance of its business license, and the remaining shall be paid up within 2 years from the date of the establishment of the corporation.

A foreign investor shall make capital contribution in convertible currency or with RMB profits obtained from within China or lawful RMB proceeds obtained from sources such as share transfer and liquidation, while a Chinese investor shall make capital contribution in RMB.

Unspecified

Foreign Shareholding

Unspecified

(i) wholly foreign-owned; or
(ii) sino-foreign joint venture

Unspecified

Categories of Funds under Management

equity investment enterprises

(i) foreign-funded equity investment enterprises;
(ii) private equities ("PE");
(iii) venture capital ("VC") funds

(i) foreign-funded equity (venture capital) investment management enterprises;
(ii) foreign-funded equity investment enterprises

Prohibitive Provision

Unspecified

No direct investment in any project

No business irrelevant to equity (venture capital) investment

Foreign Investors

(i) haver at least 1 investor; and
(ii) the business scope of the investor or 1
of its affiliates is related to equity investment or equity investment
management

specific requirements[6][7] on:
(i) assets; or
(2) license

Unspecified

Domestic Investors

Unspecified

Domestic PE/VC Management Enterprises

Unspecified

Domestic PE/VC Management Enterprises may participate in pilot trials

Requirements on domestic PE/VC management enterprises if promoting or managing foreign-funded equity investment enterprises[8]

Unspecified

b.    FEIEs:

 

Shanghai

Shenzhen

Zhuhai

Guangzhou

Business Form

company or partnership

Capital Contribution

The subscribed capital shall NOT be less than $15 million, and the capital shall be contributed in monetary form only.

No minimum requirement

Except general partners, each limited partner shall make capital contribution of $1 million or more.

specific requirements on contribution for a domestic or foreign-funded enterprise to become a limited partner[9]

No specific requirements

unspecified

A foreign investor shall make capital contribution in convertible currency or with RMB profits obtained from within China or lawful RMB proceeds obtained from sources such as share transfer and liquidation, while a Chinese investor shall make capital contribution in RMB.

unspecified

Prohibitive Provision

shall NOT:
(i) investing in a prohibited field;
(ii) trading stock and corporate bonds on the secondary market;
(iii) trading futures and other financial derivatives;
(iv) directly or indirectly investing in real estate not for its own use;
(v) making investment by misappropriating funds of others;
(iv) providing loans or security for other persons

shall NOT establish foreign-funded equity investment management enterprises in the form of funds of funds ("FOF")

shall NOT invest through the form of funds of funds ("FOF") with some exceptions

shall NOT invest in investing in a field where foreign investment is prohibited; and invest in any restricted fields in accordance with law



[1] Article 5 To apply for the QDII qualification, an applicant shall meet the following requirements:

(1) It has a stable source of finance and a good credit status, and its assets scale and operating life, etc. meet the requirements as set down by the CSRC;

(2) It has a qualified staff who has the experiences in overseas investment management;

(3) It has a sound governance structure and a perfect internal control system, as well as normalized business conducts;

(4) It has not been subjected to any major punishment by the regulatory organ for the recent three years, and has nothing important being investigated by the judicial organ or the regulatory organ; and

(5) Other requirements determined by the CSRC according to the principle of prudent supervision.

[2] Article 6 The requirement as mentioned in Article 5 (1) means that:

(1) For a fund management company: its net asset is no less than 0.2 billion yuan, it has engaged in the management of securities investment funds (hereinafter referred to as the fund) for no less than two years, and its asset management scale at the end of the latest quarter is no less than 20 billion yuan or the foreign exchange assets in an equivalent value;

(2) For a securities company: all of its risk control indicators conform to the prescribed standards, its net capital is no less than 0.8 billion yuan; the proportion of its net capital to its net assets is no less than 70%, it has engaged in the business of asset pool management plans (hereinafter referred to as the pool plan) for one year or more, and its asset management scale at the end of the latest quarter is no less than 2 billion yuan of assets or the foreign exchange assets in an equivalent value.

 

[4] Except as otherwise provided for by the CSRC, a fund or pool fund may make investment in the following financial products or instruments:

(a)     Bank deposits, negotiable certificates of deposit, bank acceptance, bank paper, commercial paper, repurchase agreements, short-term government bonds, and other instruments on the currency market;

(b)     Government, corporate and convertible bonds, mortgage-backed securities (MBS), asset-backed securities (ABS) and securities issued by an international financial organization that has been accredited by the CSRC;

(c)      Common stocks, preference stocks, global depository receipts (GDR), American depository receipts (ADR), and real estate investment trust receipts listed and traded on the securities market of a country or region that has signed a memorandum of understanding on the bilateral regulatory cooperation with the CSRC;

(d)     Funds raised by public offerings that have been registered with the securities regulatory authorities of a country or region that has signed a memorandum of understanding on the bilateral regulatory cooperation with the CSRC.

(e)     Structured products linked to such subject matters as fixed income, equity, credit, commodity index and fund; and

(f)      Such financial derivatives as forwards, swaps, and warrants, options and futures listed and traded on an overseas stock exchange that is accredited by the CSRC.

[5] In January 2019, the total QFII quota was $300 billion while the RQFII quota was set at 1,940 billion RMB.

[6] The QFLP Measures in Shenzhen also clearly specify the conditions to be met by domestic and foreign shareholders and partners:

(a)     Foreign investors should meet either of the following conditions:

(i)    in the fiscal year prior to applying, hold proprietary assets (net assets) of not less than $100 million or its equivalent or hold assets under management of not less than $200 million or its equivalent;

(ii)   hold an asset management license issued by the Hong Kong Securities and Futures Commission (or other offshore financial regulatory authority).

(b)     Domestic investors should meet either of the following conditions:

(i)    be a licensed financial institution approved by the state financial regulatory department, such as a commercial bank, a securities exchange, an insurance company, a trust company, a financial leasing company or a public fund management company, or a be a direct 50% or greater held subsidiary thereof;

(ii)   be a large-sized enterprise that was introduced by the municipal government, which in the year prior to applying held proprietary assets (net assets) of not less than RMB 500 million or assets under management of not less than RMB 1 billion yuan, have achieved profits for the most recent 3 consecutive years with total net profit not exceeding RMB 60 million and a cumulative total taxes paid of less than RMB 18 million.

[7] The QFLP Measures in Zhuhai also clearly specify the conditions to be met by domestic and foreign shareholders and partners:

(a)     Foreign investors should meet either of the following conditions:

(i)    in the fiscal year prior to applying, Hongkong and Macau investors shall hold proprietary assets (net assets) of not less than $6 million or its equivalent or hold assets under management of not less than $12 million or its equivalent; other investors shall hold proprietary assets (net assets) of not less than $100 million or its equivalent or hold assets under management of not less than $200 million or its equivalent;

(ii)   hold an asset management license issued by the offshore financial regulatory authority.

(b)     Domestic investors should meet either of the following conditions:

(i)    be a licensed financial institution approved by the state financial regulatory department, such as a commercial bank, a securities exchange, an insurance company, a trust company, a financial leasing company or a public fund management company, or a be a direct 50% or greater held subsidiary thereof;

(ii)   enterprise that was registered in Zhuhai, which in the year prior to applying held proprietary assets (net assets) of not less than RMB 300 million or assets under management of not less than RMB 500 million yuan, have achieved profits for the most recent 3 consecutive years with total net profit not exceeding RMB 60 million and a cumulative total taxes paid of less than RMB 18 million; or the other offshore mainboard listing enterprises or its controlling shareholders.

[8] The QFLP Measures in Zhuhai also clearly specify the conditions to be met by any domestic PE/VC management enterprises which applies for participating in promoting or managing foreign-funded equity investment enterprises:

(a)     management institutions or its controlling shareholders, registered and incorporated in accordance with law in China, and registered for more than 6 months at the Asset Management Association of China;

(b)     management institutions or its controlling shareholders, which in the prior fiscal year, held proprietary assets (net assets) of not less than RMB 300 million or assets under management of not less than RMB 500 million yuan;

(c)      it has a sound governance structure and effective internal control rules, has not been subject to any punishment by the judicial authorities and relevant regulatory authorities in the past 3 years, and has not been listed in serious illegal and dishonest enterprise list system or abnormal business or business lost contact list system;

(d)     it shall be registered in Zhuhai.

[9] A domestic or foreign-funded enterprise must satisfy the following conditions to become a limited partner:

(c)      in the case of an institutional investor, if a foreign institutional investor, possess net assets of not less than $5 million or its equivalent, with a single investment of not less than $1 million or its equivalent; if a domestic institutional investor, hold net assets of not less than RMB 10 million, with a single investment of not less than RMB 1 million;

(d)     in case of individual investors, for both the domestic and foreign individual investors, hold financial assets of not less than RMB 3 million or achieve an average annual income of not less than RMB 500,000 for last 3 years, with a single investment of not less than RMB 1 million.

Besides this restriction, if the general partner and the limited partner of a FEIME are controlled by the same controller, the total capital contribution ratio of that controller cannot exceed 50%.

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