Qualified Foreign Institutional Investor (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) – regulatory memo

Qualified Foreign Institutional Investor (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) are the quota/approval-based inbound investment programmes launched by the Chinese government in 2002 and 2011 respectively. These programmes enable qualified foreign institutional investors to gain direct access to China capital markets in order to trade “A-shares” of Chinese stocks, bonds and securities investment funds, etc., denominated in China’s renminbi/yuan (RMB).

About the Qualified Foreign Investor (QFI)

In November 2020, a new QFI regime (QFII and RQFII are collectively referred to as QFI) went into force, which has eased the access to China capital markets. The most significant change was the merger of the QFII and RQFII schemes into one scheme, allowing for a one-time application with relaxed entry criteria and simplified application documents. The approval time was also reduced from 20 days to 10 working days once the application documentation fulfills CSRC requirements.

The investment scope is significantly extended: now foreign investors can also trade NEEQ securities, asset-backed securities, bond repo on the exchange markets and financial futures, commodity futures, options and also engage in margin trading and securities lending. It’s also worth noting that quotas were removed earlier in 2020 and cash repatriation process is simplified under the new QFI scheme; this means foreign investors can now remit cash freely to China as per their investment plan, and trade via QFI scheme is much more convenient than previously.

Scope

Eligible foreign applicants now include:

  • Foreign fund management institutions
  • Commercial banks
  • Insurance companies
  • Securities companies
  • Futures companies
  • Trust companies
  • Government investment management companies
  • Sovereign funds
  • Pension funds
  • Charity funds
  • Endowment funds
  • International organisations and other institutions recognised by the CSRC

QFI Criteria

The new QFI scheme has relaxed eligibility requirements by removing the net assets requirement, minimum business operating period requirement, etc.

  • The applicant shall be in sound financial conditions and good credit standing with experiences in securities and futures investment
  • The applicant’s managerial personnel in charge of domestic investment shall meet relevant professional requirements of the foreign country or region where the applicant domiciles (if such requirements exist)
  • The applicant shall have sound and effective governance structure, internal control system, and compliance management regime, and, in accordance with relevant regulations, appoint a supervisor to oversee the legality and compliance of the applicant’s domestic investment
  • The applicant’s operation is in compliance with relevant rules and regulations and has not been subject to any major punishments by regulatory authorities in the latest 3 years or since its establishment
  • No significant impact may thus be incurred to the operation of the domestic capital market

Investment scope

The new QFI scheme also expanded the investment scope.

Old QFII and RQFII investment scope:

  • Stocks, bonds and warrants traded on the stock exchanges
  • Bond products and derivatives product in CIBM approved by PBOC
  • Securities investment funds (mutual funds)
  • Index futures on CFFEX for hedging purpose
  • FX derivatives traded for hedging purposes
  • New share issuances, convertible bond issuances, secondary share offerings and subscriptions for allotments
  • Other financial instruments permitted by CSRC

In addition to the above scope, the new regime now includes the following:

  • Depository Receipts(DRs) and Asset-Backed Securities (ABS) listed on the Stock Exchanges
  • Financial futures contracts listed and traded on the China Financial Futures Exchange (CFFEX) for hedging purpose
  • Bond repo on the stock exchanges
  • Stocks listed in National Equities Exchange and Quotations (NEEQ, “The New Third Board”)
  • Commodities futures listed in eligible commodity futures exchanges approved by CSRC
  • Listed options in exchanges approved by the State Council or the CSRC
  • Margin financing, securities financing and securities lending
  • PFM funds registered with AMAC or founded by a securities or futures institution where the investment scope should be within the QFI investment scope permitted by CSRC
  • New share issuances, bond issuances, ABS issuances, secondary share offerings and subscriptions for allotments on exchanges and NEEQ

BNP Paribas Securities Services’ view

The consolidation of QFII and RQFII schemes, coupled with the expanded scope and streamlined application process, makes the new QFI attractive to foreign investors.

Compared with other inbound investment schemes such as CIBM Direct, Bond Connect and Stock Connect, QFII and RQFII had previously more restrictions and required more time for the initial setup. With the new QFI regime in place and an even wider scope of investment, more foreign investors will start to consider accessing China capital markets via the QFI scheme.

This can also be seen as another milestone for Chinese authorities to further opening up the capital markets and as a sign of their strong willingness to attract more foreign investors.

In the long run, we also expect Chinese authorities will take some more measures to simplify the access to China and standardise processes to be more in line with international practices.

How to access China through the QFI scheme

Foreign investors are required to entrust a local QFI custodian to apply for the QFI licence with CSRC and register with SAFE. Once all the regulatory approvals are obtained, foreign investors can open the accounts to start trading.