Introduction
On 26 July 2024, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly released revised rules in respect of the investments into China’s financial market through the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor (collectively, QFII) regime (the New Rules). The New Rules will come into effect on 26 August 2024.
For background, the QFII regime allows international institutional investors who meet the qualification requirements to invest in a permitted range of financial products in mainland China’s financial market directly, without having to incorporate a local entity in China. The New Rules streamline the QFII’s investment process, including by simplifying and relaxing the requirements in respect of SAFE registration, account management, currency conversion and foreign exchange trading.
Key changes under the New Rules
SAFE registration: The New Rules clarify that from now on a QFII’s registration with SAFE (to be made via the QFII’s custodian bank in mainland China) will be conducted electronically on the online platform maintained by SAFE. The New Rules also extend the time limit for a QFII to update its SAFE registration because of a material change, such as a change of name or PRC custodian bank(s), and revocation of the QFII license etc.
Account management: Under the existing rules, if a QFII engages in both onshore securities trading and derivatives trading, it is required to open two separate RMB accounts for receiving/remitting funds for each category of trading. The New Rules remove this requirement and allow a QFII to use one combined RMB account to carry out both securities trading and derivatives trading, reducing the account management costs.
Currency conversion: The New Rules grant more flexibility in respect of the currency that a QFII can use for remitting investment earnings out of China. Under the existing rules, if a QFII injects investment principal into China in a foreign currency, it must also remit the funds out of China in the same foreign currency. However, the New Rules now allow a QFII to repatriate the funds out in either the relevant foreign currency or in RMB, alleviating the foreign exchange conversion processes.
Foreign exchange trading: The New Rules provide more flexibility for foreign exchange trading (including spot trading and derivatives trading). Firstly, the New Rules increase the quota limit for the foreign exchange derivatives trading permitted for each QFII. A QFII is now permitted to make additional foreign exchange derivatives trading to cover further the foreign exchange risk exposed by its RMB funds sitting in the bank account (which have not been used for investments). Moreover, the New Rules allow a QFII to engage in foreign exchange trading with more types of counterparties. In addition to a QFII’s custodian bank or other eligible PRC financial institutions, a QFII now can carry out the foreign exchange trading in the China Interbank Foreign Exchange Market with other eligible market participants. Please however note that the New Rules remain emphasising that foreign exchange derivatives trading should only be made on a need-basis for the purposes of hedging.
The development of the QFII regime and the continued opening of China’s financial sector
China has been steadily optimising the QFII regime to facilitate QFIIs’ investment. For example, in 2019, China removed both the overall investment quota limit for the whole QFII regime and the quota limit applicable to each QFII, and, in 2020, China consolidated the parallel regimes of the Qualified Foreign Institutional Investor regime and the Renminbi Qualified Foreign Institutional Investor regime (click here to read our update on such consolidation). The New Rules have demonstrated China’s resolution to welcome and ease further foreign investment into mainland China’s financial market.