New foreign exchange regulations applicable to QFII/RQFII investors

On May 7 2020, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly issued the regulations on funds of securities and futures investment by foreign institutional investors 《境外机构投资者境内证券期货投资资金管理规定》 (PBOC & SAFE Announcement〔2020〕No. 2, the new regulation). The new regulation aims to lift the quota requirements and simplify the administrative requirements for remittance and repatriation of funds as well as currency exchanges by the QFII/RQFII investors and will become effective on June 6 2020.

Many provisions of the new regulation seem to echo with the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (draft for comments)《合格境外机构投资者及人民币合格境外机构投资者境内证券期货投资管理办法（征求意见稿）》and its implementing rules issued by the China Securities Regulatory Commission (CSRC) on January 31 2019 (the draft measures), which proposed to expand the scope of permitted investments and consolidate the QFII and RQFII schemes (please refer to our previous client alert Significant changes proposed to QFII/RQFIIs for further information).

We have highlighted the following points which we believe are key to QFII/RQFII investors:

1. Lifting of quota requirements

According to the new regulations, a registration system for administration of investment by a QFII or RQFII (each a qualified investor) will be implemented by SAFE. The quota limit previously imposed on the Qualified Investor in making domestic securities and futures investment has now been lifted, which simplifies the process for foreign investors to make direct investments into China’s financial markets.

Under the previous regulatory framework, a qualified investor was required to firstly obtain a QFII or RQFII licence from CSRC and further obtain a basic investment quota through registration with SAFE (which is calculated based on the gross assets or the asset under management of the qualified investor or its parent group); any application for an investment quota higher than the basic quota was subject to discretionary approval by the SAFE. With the new regulation, a qualified investor is no longer required to obtain a quota, and instead is required only to obtain a licence from CSRC and apply for registration with SAFE before proceeding to make investments into China’s financial markets.

Furthermore, when registrating with SAFE QFII or RQFII it would no longer be required to provide an audit report for the past three years and requisite form becomes largely simplified.

2. Wider discretion for QFII/RQFII license holders

Free to choose the currency remitted inwards

The new regulation no longer differentiates the QFII program much from the RQFII program and mentioned that qualified investors who remit funds for investment might choose the currency at its own discretion (between offshore RMB and foreign currency). The previous rule issued by SAFE in 2018, in comparison, is that QFII investors may only remit foreign currency, and RQFII investors may only remit offshore RMB for investment.

It is worth mentioning that prior to the official issuance of the draft measures, the QFII and RQFII programs are still separate and distinct programs, whereas the new regulations have now eliminated the most significant difference between these two and therefore blurred the distinction between QFII and RQFII.

The new regulations also clarify that the repatriation currency for investment should be the same as the currency remitted inwards. Currency arbitrage based on RMB and other foreign currencies is not permitted.

Capital deployment

According to the new regulations, qualified investors who remit foreign currency for investment may deploy its capital for QFII/RQFII investment in accordance with its own business needs and timetable.

Compared with the previous rule, the new regulations grant wider discretion and flexibility to the qualified investors in capital deployment by removing the need for a qualified investor to transfer the foreign currency funds into its RMB account 30 working days prior to the actual investment.

Investment proceeds repatriation

Furthermore, according to new regulations, where a qualified investor needs to remit its accumulated profits, the qualified investor needs only to submit to the custodian a written application or instruction, along with an undertaking letter to fully pay taxes in accordance with the relevant tax laws and regulations in China, for the custodian to handle the relevant fund remittance procedures.

Compared with the previous rule, the new regulations grant wider discretion and flexibility to the qualified investors in capital deployment by replacing the old requirement for qualified investors to submit a special audit report on returns on investment issued by a Chinese certified public accountant and tax clearance or tax filing certificates with an undertaking letter. In practice, this option will make the process months quicker than the to repatriate profits to overseas.

3. Custodian and main rapporteur

Same as the draft measures, the new regulations also indicate that the qualified investor may appoint more than two custodians. Where a qualified investor appoints more than two custodians, it shall designate one custodian as the main rapporteur (and if there is only one custodian, then that custodian is the main rapporteur by default) to be responsible for handling business registration and other matters on the qualified investor’s behalf. This grants more discretion to the QFII/RQFII to appoint different custodians to its different lines of products (eg alternative funds vs UCITS funds).

4. Expanded investment scope

The new regulations appear to echo the draft measures by indicating an expanded scope of investment. Currently, QFIIs are allowed to invest in only A-shares, bonds, public securities investment funds, stock index futures, and certain foreign exchange derivatives for foreign exchange hedging purposes. The draft measures expand the scope by permitting qualified investors to additionally trade:

• shares traded on the National Equities Exchange and Quotations (NEEQ, ie China’s OTC board);
• depository receipts;
• bond repo;
• ABS;
• financial futures listed and traded on the China Financial Futures Exchange (not limited to stock index futures but also include bond index futures);
• commodity futures traded on futures exchanges approved by CSRC; and
• options traded on futures exchanges approved by the State Council or CSRC.

In line with the draft measures, from a foreign exchange supervisory perspective, the new regulations permit the qualified investor to invest in the futures market in addition to the securities market, which eliminates the administrative obstacle for a qualified investor to trade financial futures, commodity futures as well as the options traded on futures exchanges. Similarly, the new regulations permit the qualified investor to trade the financial derivatives products in accordance with the relevant law, which eliminates the administrative obstacle for qualified investor to trade products such as the bond repo and ABS.

Conclusion

The new regulations remove some of the restrictions and obstacles faced by foreign investors when making investments in the PRC market under the QFII/RQFII programs, which would greatly facilitate and incentivise the foreign investors’ participation in China’s financial market.

The issuance of the new regulation as well as the consistent approaches taken by the new regulation and the draft measures with respect to the number of custodians and expanded investment scope seems to suggest that the long-anticipated (and potentially more authoritative) draft measures may be finalised in the near future.