To encourage inflow of foreign funds into China's securities market, the State Administration of Foreign Exchange (SAFE) has relaxed its regulatory regime on qualified foreign institutional investors (QFIIs) since 3 February 2016. The new regime is lowering quota restrictions and providing greater flexibility for QFIIs' capital mobility.

Background

The QFII scheme is the primary channel for foreign institutional investors to invest in China's securities market. Under the previous regime, after obtaining a license from the China Securities Regulatory Commission (CSRC), each QFII had to apply to SAFE for approval for an investment quota. QFIIs' remittance of capital was also subject to stringent restrictions. These have been largely relaxed by the Foreign Exchange Administrative Measures on Investment in Domestic Securities by Qualified Foreign Institutional Investors (合格境外机构投资者境内证券投资外汇管理规定) (Revised Measures), which entered into effect on 3 February 2016.

Highlights

Relaxed Quota Scheme

Previously, a QFII had to apply for SAFE approval for each quota application regardless of the amount. SAFE would review the application and grant approval on a case-by-case basis. The new regime has changed this scheme by introducing a concept of "Basic Quota" - if the quota being applied for is within the range of the Basic Quota, a QFII only needs to complete a record-filing with SAFE. The Basic Quota, capped at USD 5billion, is primarily a percentage of a QFII's asset value (or assets under its management) that can be calculated according to the formula provided by the Revised Measures. This new scheme removes the uncertainty involved in the previous quota allocation process. SAFE approval is now only required if a QFII applies for a quota exceeding its Basic Quota amount. This also applies to QFIIs seeking to increase their existing quota.

More Flexibility for Capital Remittance

In addition, repatriation of investment principal is no longer subject to SAFE approval. SAFE will monitor QFIIs' quota based on their net capital inflows.

Under the old rules, the investment principal of a QFII (except for a limited types of funds, such as open-ended funds) is subject to a one-year lock-up period. The Revised Measures shortens this lock-up period to three months, making all types of QFIIs subject to the same lock-up period. The three-month period starts to count once a QFII's injected capital aggregates to USD 20million (instead of from the time the QFII has fully paid up the amount of its investment quota as stipulated by the old rules).

Prior to the Revised Measures, a QFII had to inject the full investment amount within six months after obtaining SAFE's approval on its quota. The Revised Measures remove this deadline, but in the meantime it also require QFIIs to use their quota within one year after completing their record-filing or approval procedure with SAFE. SAFE retains the power to cancel a QFII's quota if it fails to use the quota before the deadline.

For open-ended funds managed by QFIIs, they can now remit and repatriate funds on a daily basis rather than a weekly basis as under the old rules.

Comments

These regulatory changes indicate the Chinese government's desire to attract more foreign funds into China's capital market amid recent market volatility. QFIIs are expected to benefit from the relaxed regime in developing their investment strategies and managing their fund flows. However, as market conditions continue to fluctuate, it remains to be seen whether in practice QFIIs will be interested in applying for any increased quota.

In contrast to its efforts to encourage funds inflow, SAFE continues to tighten its policy on funds outflow under the qualified domestic institutional investors (QDIIs) scheme. Over the past 12 months, only a very limited amount of new QDII quota were approved. The differences in policies over QDIIs and QFIIs indicate the Chinese government's determination to tackle issues arising from the decrease in China's foreign exchange reserves.

Originally published 4 March 2016

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