China: The Next Step For Offshore RMB: The RMB Qualified Foreign Institutional Investor Scheme

Last Updated: 12 January 2012
Article by Angelyn Lim and Kylee Zhu


The eagerly awaited Renminbi Qualified Foreign Institutional Investor Scheme (the "RQFII Scheme") was launched in the People's Republic of China (the "PRC") on 16 December 2011 pursuant to the "Rules on the Pilot Scheme for Onshore Securities Investment by Fund Management and Securities Companies which Qualify as Renminbi Qualified Foreign Institutional Investors" (基金管理公司、證券公司人民幣合格境外機構投資者境內證券投資試點辦法) (the "RQFII Rules"). The RQFII Scheme is an extension of the existing US Dollar-denominated Qualified Foreign Institutional Investor program which permits approved foreign institutional investors to invest in the PRC A Share market. The RQFII Scheme conversely allows Chinese financial firms, indirectly through their Hong Kong-incorporated subsidiaries, to apply for RQFII licenses and quotas to utilize RMB funds raised in Hong Kong for the purposes of investing in the PRC securities market.

The RQFII Scheme is expected to broaden the investment channels available to offshore RMB funds and further boost PRC efforts to internationalize the RMB. The RQFII Scheme also facilitates the flow of offshore RMB funds back into the PRC and is expected to diversify the range of investment products available to offshore RMB funds, providing support to the offshore RMB business.

The RQFII Scheme Details

The RQFII Scheme is available to a licensed Hong Kong subsidiary ("HK Subsidiary") of a fund management company or a securities company incorporated in Mainland China. The HK Subsidiary must have obtained a RQFII license from the China Securities Regulatory Commission ("CSRC") and an RMB investment quota from the State Administration of Foreign Exchange ("SAFE"), so as to raise RMB funds in Hong Kong for the purposes of investing in the securities market in Mainland China (within the approved RMB investment quota). SAFE has approved an initial total investment quota of RMB20 billion (approximately US$3.1 billion) for the RQFII Scheme. RQFIIs are permitted to repatriate the principal capital and investment proceeds denominated in RMB or in foreign currencies.

Apart from appointing securities companies in Mainland China to act as the RQFII's brokers for securities trading, the RQFII must also engage a domestic Chinese commercial bank which is qualified as an RQFII custodian and settlement agent in the interbank bond market, which will act as the custodian and settlement agent of the RQFII. The custodian is expected to take on the role of the account manager of the RQFII and is obliged to oversee the onshore investments made by the RQFII. Pursuant to the guidelines issued by the People's Bank of China (the "PBOC") on 4 January 2011 (the "PBOC Guidelines"), RQFIIs are required to open RQFII basic deposit accounts for settlement purposes and "special" deposit accounts with their custodians. Under the PBOC Guidelines, RQFIIs are permitted to open three types of special deposit accounts with their custodians and settlement agent banks, for: (i) transactions in the interbank bond market; (ii) bond market trading of exchange-traded funds; and (ii) stock market settlements. Further, although capital may be transferred between the three special deposit accounts, transfers between any special deposit account and the basic deposit accounts are prohibited. Cash withdrawals from special deposit accounts are likewise not permitted.

To qualify to be approved by the CSRC as an RQFII, the relevant HK Subsidiary must satisfy the following requirements:

  • it possesses a Type 9 (asset management) regulated activity license issued by the Hong Kong Securities and Futures Commission (the "SFC"), it has commenced its asset management business and is financially stable with a good credit standing;
  • it has an effective corporate governance and internal control system in place and its employees comply with the eligibility requirements under Hong Kong law;
  • neither it nor its Mainland Chinese parent company is subject to any material penalty imposed by the respective local regulator in the last three years;
  • its Mainland Chinese parent company is eligible to engage in the business of securities brokerage or asset management in Mainland China; and
  • it meets such other requirements as may be stipulated by the CSRC in accordance with the principles of prudent supervision.

Approval Timelines

In accordance with the RQFII Rules, the CSRC will, within 60 days of receipt of a complete RQFII license application, determine whether or not to grant approval. A RQFII licensee must then, within 12 months of receiving the RQFII license, apply to SAFE for an investment quota. SAFE will act on a complete quota application within 60 days of receipt. If the RQFII licensee fails to apply to SAFE within the 12-month period, the RQFII license must be returned to the CSRC.

Permissible Investments

RQFII funds may only invest in certain types of onshore RMB financial instruments which are approved by the CSRC and the PBOC. These financial instruments include, but are not limited to, shares, bonds and warrants listed on stock exchanges, and securities investment funds. RQFII funds may also subscribe to initial public offerings, convertible bonds and secondary offerings. The proportion of the capital that is invested in these financial instruments must also comply with specified restrictions. Currently, RQFII funds must be invested to at least 80% in fixed-income products (i.e. various bonds and fixed-income securities funds) and no more than 20% in equities or equities investment funds.

Latest Developments

On 22 December 2011, nine Hong Kong-incorporated Type 9 licensed corporations that are subsidiaries of Mainland Chinese asset management companies were awarded the first batch of RQFII licenses. A further 12 RQFII licenses were awarded to Hong Kong-incorporated Type 9 licensed corporations which are subsidiaries of Mainland Chinese securities firms. SAFE followed by granting its first quotas to 10 of the existing RQFII licensees, which totaled RMB10.7 billion (approximately US$1.7 billion), of which the largest individual quota was RMB1.2 billion (approximately US$190.4 million), which was awarded to China Asset Management Company Ltd.

Going Forward

The RQFII Scheme has been generally well received by the Hong Kong financial services industry, providing further diversity to the range of RMB-denominated investment products available to investors in Hong Kong. SFC reports also indicate that approximately 20% of the corporate license applications received by the SFC during the third quarter of 2011 for regulated activity licenses had been from subsidiaries of intermediaries regulated by the CSRC, and that the total number of new license applications received had risen 14% on-quarter to 3,818. While the benefits of the RQFII Scheme to the larger Mainland Chinese securities and fund management companies and local custodians are clear, it is unlikely that smaller Chinese players will benefit to the same extent. Some international players are already benefitting from having established a joint venture RQFII with a Mainland Chinese majority partner, but it is currently not clear if they will also be able to benefit by being appointed as investment advisers or other service providers to RQFIIs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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