Access to China – an overview of the cross border programmes

This article sets out various cross-border programmes currently available to foreign asset managers to access China's financial market without the need to incorporate a local entity in the PRC.  For more information about foreign asset managers operating in China, please see our Insight.

QFII/RQFII

The Qualified Foreign Institutional Investor (QFII) scheme is a transitional arrangement which allows institutional investors who meet certain requirements to invest in the PRC equities and bonds markets. Under the QFII scheme, QFIIs can invest in the PRC equities and bonds market without having to incorporate a local entity in China.

The QFII scheme was introduced back in 2002 as the first channel for foreign investors to access the PRC market. Subsequently in 2011, the RMB Qualified Foreign Institutional Investor (RQFII) scheme was introduced as part of an effort to internationalise the Renminbi (RMB).   The key difference between the QFII scheme and the RQFII scheme is that QFIIs remit foreign currency, which is then converted into RMB, whereas RQFIIs use offshore RMB.

Both the QFII scheme and RQFII scheme have undergone various reforms over the years. In particular, the reforms have centred around an increasing relaxation of the restrictions on eligibility, quotas, investment options and the remittance of funds.

In recent years, interest in the QFII and RQFII schemes has dwindled due to the launch of other channels available for foreign investors to access the PRC market, such as Stock Connect and Bond Connect.

In order to attract more overseas capital investment, and boost and internationalise its domestic securities and futures market, Chinese authorities are working on a series of measures to reform the QFII and RQFII schemes. 

On 31 January 2019, China Securities Regulatory Commission ("CSRC") newly published two consultation papers, which propose to combine the QFII and RQFII schemes and to greatly expand their investment scope. In addition to stocks and bonds, QFIIs and RQFIIs would be allowed to purchase securities traded on China's main over-the-counter equity market (i.e. the New Third Board), derivatives (including financial futures, commodity futures and options) and private securities investment funds. Such proposals, if officially implemented, will open a new horizon for private fund managers ("PFMs") to raise capital from foreign investors. The new rules were now issued and will take effect from 1 November 2020.

Please see more details via our Insights on New CSRC QFII Rules, CSRC QFII reforms and SAFE rules.

Stock Connect

Before the introduction of the China-Hong Kong Stock Connect (Stock Connect), only a small number of institutional investors were able to trade PRC-listed shares through the QFII and RQFII schemes. Following the launch of Stock Connect, all Hong Kong and overseas investors can now trade PRC-listed shares via the Hong Kong Stock Exchange (HKEx).

Stock Connect was launched as a mutual market access programme between Hong Kong and Shanghai in 2014, and as a mutual market access programme between Hong Kong and Shenzhen in 2016.  Stock Connect enables both Northbound trading and Southbound trading. In Northbound trading, Hong Kong and overseas investors trade eligible A-shares listed on the Shanghai Stock Exchange (SSE) or the Shenzhen Stock Exchange (SZSE) via HKEx. In Southbound trading, eligible investors in the PRC trade shares listed on the HKEx via the SSE or the SZSE. At inception, Stock Connect only encompasses secondary market trading; primary market activities such as initial public offerings are not supported.

Under the QFII and RQFII scheme, QFIIs and RQFIIs are allowed to invest in all listed shares and stock index futures in China. By comparison, Hong Kong and overseas investors under Stock Connect have a more limited selection of investable securities, which comprises only of the constituent stocks of the SSE 180 Index and the SSE 380 Index, the constituent stocks of the SZSE Component Index and the SZSE Small/Mid Cap Innovation Index which have a market capitalization of not less than RMB 6 billion, and all the other SSE/SZSE-listed A shares which have corresponding H shares listed on Hong Kong Stock Exchange.

CIBM Direct/Bond Connect

The China Interbank Bond Market (CIBM) is an OTC market on which fixed income products of approximately 90% in value of the total are traded.

There are two routes for international investors to gain access to CIBM: the first one is known as CIBM Direct, under which route foreign central banks, international financial organizations and sovereign wealth funds can purchase bonds and engage in bond lending, bond forwards, interest rate swaps, forward rate agreements and bond repos; the second one is known as Bond Connect, which is a mutual market access scheme that allows foreign investors to trade bonds in the CIBM through an international electronic platform (i.e. Tradeweb or Bloomberg) outside China. Both routes are regarded as supplementary to the QFII and RQFII schemes.

Investors which utilise CIBM Direct are required to go through a series of procedures to comply with the foreign exchange/clearing and settlement requirements. For instance, CIBM Direct investors are required to register, file and open special RMB accounts with the People's Bank of China (PBOC), and open a bond account and a Delivery Versus Payment cash clearing account with the China Central Depository and Clearing Co. Ltd. and the Shanghai Clearing House.

On the other hand, the Bond Connect scheme enables PRC and offshore investors to trade bonds on the PRC and Hong Kong bond markets with greater efficiency and convenience.

Unlike CIBM Direct, which requires foreign institutions to complete the necessary filing and account opening procedures, offshore investors under the Bond Connect scheme are permitted to make use of their existing accounts in Hong Kong to directly access the PRC bond market. This avoids the need to deal with PRC authorities for market entry, trading qualifications, foreign exchange settlement and other issues.

Although CIBM Direct has a wider investment scope as abovementioned, the particular trading and settlement procedures and standards for trading documents employed by CIBM renders it less "user friendly" than Bond Connect is to foreign investors.

Commodity futures products that are available to foreign investors

Currently, overseas entities and individual investors that meet certain criteria regarding its capital, expertise, operations, governance and experience may trade four special types of futures products directly on the respective futures exchange.

These four special types of products including crude oil, iron ore, purified terephthalic acid (PTA) and technically specified rubber (TSR) 20, which are traded through the Shanghai International Energy Exchange, Dalian Futures Exchange and Zhengzhou Commodity Exchange.

In addition to allowing foreign qualified traders to trade futures products directly, QFIIs have been permitted to trade stock index futures but for hedging purpose only. As we mentioned in Section 1, CSRC published two consultation papers to solicit public comments on the new consolidated regime for QFIIs and RQFIIs. One of the most significant changes under the consultation papers is the expansion of the investment scope, under which QFIIs' and RQFIIs' scope of investment in derivatives will be expanded to include, amongst others, financial futures and commodity futures whilst the exact types of products will be subject to suggestions from the exchanges and approval by CSRC. This has been regarded by the market as a positive sign to further vitalise China's futures market.

MRF

The Mainland-Hong Kong Mutual Recognition of Funds (MRF) scheme is another effective channel for retail investors in China to access overseas markets and diversify their investments and risks.

The MRF scheme was launched on 1 July 2015 with a total investment quota of RMB 600 billion following a Joint Announcement made by Hong Kong's Securities and Futures Commission and CSRC on 22 May 2015.

The MRF scheme allows PRC and Hong Kong funds authorised for retail distribution in their home jurisdiction to follow a streamlined procedure to obtain authorisation for retail distribution in the other market. However, it does not permit funds authorised for retail distribution in their home market to be privately placed in the other market.

The MRF scheme represents a further step in the opening up of the PRC's capital market and follows the success of Stock Connect between Hong Kong and Shanghai that was launched in November 2014.