Ireland: Irish Funds Grasp QFII And RQFII Opportunities

Last Updated: 1 May 2014
Article by Paul Moloney, Brian Dillon, Brian Kelliher and Brian Higgins

Most Read Contributor in Ireland, July 2017

This note is an update to a note first published in July 2013. The pace of change in respect of particularly the RQFII scheme has continued unabated as the Chinese authorities continue to liberalise access to China A Shares for foreign investors.

The Qualified Foreign Institutional Investor ("QFII") scheme has since it was launched by the People's Bank of China ("PBOC"), the China Securities Regulatory Commission ("CSRC") and the State Administration of Foreign Exchange ("SAFE") in 20021 been the principal method for foreign investors to invest directly in the securities markets of China. It allows foreign institutional investors to invest in China's capital markets, subject to first obtaining a QFII license from the CSRC and then an investment quota allocated by the SAFE.

CSRC, PBOC and SAFE have taken a gradual approach to broadening the appeal of the QFII scheme to foreign investors by lowering the threshold requirements for applicants seeking QFII licences, expanding the universe of permissible investments available to QFIIs and increasing the total QFII quota in April 2012 by US $50 billion to US $80 billion and on 12 July 2013 from US $80 billion to US $150 billion.

The RQFII scheme which was originally introduced in December 2011 as a means of allowing the Hong Kong operations of mainland Chinese financial institutions to raise Renminbi ("RMB") in Hong Kong for investment in the Chinese capital markets has undergone rapid change from inception. Ultimately those changes gave rise to the possibility of UCITS funds being in a position to invest 100% of their assets into China A Shares, giving investors in such UCITS funds unparalleled access to the A share market.

This opportunity was quickly grasped and the first RQFII UCITS Fund was approved by the Irish Central Bank on the 16th of December 2013, showing the commitment of Ireland as a funds domicile to embrace these developments and to offering fund managers domiciled in Ireland the broadest range of possibilities for investing into the China A Share market as soon as regulatory developments permit. As the first mover in this area, Ireland is continuing its tradition of embracing regulatory developments and responding quickly to them.

Even with these refinements, current investments by QFIIs and by Renminbi Qualified Foreign Institutional Investors ("RQFIIs") are generally estimated to account for less than 2% of the total investments in China's A-share markets.2

The changes continued apace in 2014 and included the announcement by the Shanghai stock exchange that the shareholding limit for both QFII and RQFII in any single company is to be raised to 30% from 20%. The Chinese authorities are also working towards clarifying the tax treatment of gains under the QFII scheme and recently announced an allocation of RQFII quota to France of RMB 80bn. The announcement of an allocation of RQFII quota to France follows announcements in 2013 of allocations of RMB 100bn of RQFII quota to Taiwan, RMB 80 bn of RQFII quota to London and RMB50bn of RQFII quota to Singapore.

As RQFII is extended to more markets around the world a key consideration for those managers is how they can utilize QFII and RQFII to offer their clients in the EU, Latin America, Middle East and Africa access to the Chinese capital markets. In this memorandum we will provide an overview of the QFII and RQFII schemes and how managers in any jurisdiction with RQFII quota can utilise such quota in Irish UCITS and AIFMD compliant funds.

We have set out in this memorandum our understanding of the QFII and RQFII schemes and the interpretation of the rules of those schemes by PBOC, SAFE and CSRC as at April 2014. However, readers should be aware that the rules of both schemes have undergone rapid change and both the rules and interpretation thereof by the relevant authorities are subject to change.

QFII OVERVIEW

QFIIs and QFII products are broadly classified into three types for both the purposes of the SAFE regulations3 and for foreign exchange purposes:

  1. Long term investors such as pension funds, insurance funds, charitable foundations, endowment funds, government and monetary authorities ("Long-Term Funds");
  2. Open-end China funds (essentially a type of fund product managed by a QFII) which are defined as open-end securities investment funds set up offshore by QFIIs via public placements, where at least 70% of their assets are invested in the securities market in China ("Open-end China Funds"); and
  3. Mandates managed by a QFII, QFIIs' proprietary money if the QFII does not qualify as Long-Term Fund, funds managed by a QFII that do not qualify as Open-end China Funds, etc. ("Other Funds").

Under the QFII regulations4, QFIIs must generally within six months of having each investment quota approved5, remit the investment principal into China, and may not commence investment operations until the remittance of US$20 million or more as investment principal has occurred.

Where a QFII does not remit the full amount of the investment quota within the above timeframe, this will result in the unremitted portion of the quota being forfeited unless an approval allowing an extended period for remittance has been granted.

The QFII regulatory regime also imposes significant restraints upon repatriation of assets from China with the nature of the restrictions on repatriation varying according to the type of QFII making the repatriation or the QFII product to which the repatriation relates (i.e. Long- Term Funds, Open-end China Funds and Other Funds).

All investment amounts invested through the QFII channel are subject to a lock-up period during which QFIIs are prohibited from remitting such funds out of China. The lock-up period is calculated from the date when the investment principal is remitted in full or when the six-month remittance period falls due, whichever is earlier.

Under the 2009 SAFE QFII Rules, a three month lock-up period applied to Open-end China Funds and Long-Term Funds, while for Other Funds the lock-up period was one year.

Once the initial lock-up period was over, the 2009 SAFE QFII Rules provided that an Open-end China Fund may remit funds to or repatriate funds from China without SAFE's approval on a monthly basis depending on the net subscriptions or redemptions of the fund and provided that the net remittance to or repatriation from China did not exceed US$50 million per month.

For Long-Term Funds and Other Funds, which intended to repatriate either principal or profits following the applicable lock-up period, prior approval of SAFE was required on a case-by-case basis. Any repatriation of principal by funds other than Open-end China Funds results in the QFII quota being reduced by an amount equivalent to the repatriated principal amount.

The custody of assets held by all QFIIs has also given rise to concerns. Under the QFII regime prior to the introduction of the 2012 QFII Measures, QFIIs were required to hold client assets apart from the assets of Open-end China Funds in a single securities account, which gave rise to significant custody and asset segregation risks for QFII clients.

2012 CHANGES TO THE QFII SCHEME

A number of important changes to the QFII scheme were made during 2012 which were intended to continue the process of opening China's securities markets to foreign investors. We have set out the principal changes below:

Easing of Requirements for Applicants

The 2012 QFII Measures have substantially eased the requirements which applicants for a QFII quota have to meet. This has opened up the possibility of obtaining a QFII quota to a much broader pool of potential applicants. Appendix 1 sets out these reduced criteria.

Increase in QFII Investment Quota

Under the 2009 SAFE QFII Rules, all QFIIs were subject to a maximum investment quota per investor of US$1 billion. The 2012 SAFE QFII Rules remove the US$1 billion ceiling for three types of QFIIs, namely sovereign wealth funds, central banks and monetary authorities. The ceiling still applies to other QFIIs.

Expansion of the Scope of Investment

Previously, QFIIs could only invest in (i) stocks, bonds, warrants traded in or transferred in stock exchanges; (ii) securities investment funds; and (iii) other financial instruments permitted by the CSRC. The 2012 QFII Measures permit QFIIs to invest in stock-index futures and fixed-income products traded on the inter-bank bond market. While this expansion in the scope of investments is welcome, it should be noted that the requirement that at least 50% of a QFIIs assets be invested in listed equities remains.

The 2012 QFII Measures also loosened the restriction on the cap of the aggregated amount of China A shares that all foreign investors may hold in a listed company from not exceeding 20% to 30%. The cap of the amount of China A shares that a single investor may hold remains unchanged at 10%.

Relaxation of the limits on Repatriation/Remittance of Funds by QFIIs

The 2012 SAFE QFII Rules continue to distinguish between Long-Term Funds, Open-end China Funds and Other Funds in connection with foreign exchange controls while introducing a number of important changes to the QFII scheme.

Open-end China Funds

Open-end China Funds are now allowed to remit into or repatriate out of China the net difference between subscription and redemption amounts on a weekly basis, compared with a monthly basis under the 2009 SAFE QFII Rules.

In addition, fund remittances and repatriations by Open-end China Funds are no longer subject to SAFE's prior approval, regardless of the amount involved, whereas, under the 2009 SAFE QFII Rules, SAFE's prior approval was required where the net amount remitted or repatriated exceeded US $50 million. Fund repatriation by an Open-end China Fund under the 2012 SAFE QFII Rules remains however subject to a monthly cumulative limit of 20% of the total onshore assets of that fund as of the previous year. This limit is, we understand, calculated separately from other products managed by the same QFII.

Long-Term Funds and Other Funds

Previously, the repatriation of both investment principal and profits by Long-Term Funds and Other Funds required SAFE's approval. The 2012 SAFE QFII Rules however, remove the approval requirement for profit repatriation by Long-Term Funds and Other Funds. As a result, profits may now be repatriated by Long-Term Funds and Other Funds without SAFE's prior approval subject to all required documents being in place.

Under the 2012 SAFE QFII Rules a cap is imposed on total monthly repatriation (principal and profits) by Long-Term Funds and Other Funds, which is set at 20% of its total onshore assets as at the end of the previous year. As mentioned, any repatriation of principal by funds other than Open-end China Funds results in the QFII quota being reduced by an amount equivalent to the repatriated principal amount.

QFII Account Structure

The 2009 SAFE QFII Rules introduced a multiple bank account structure. A QFII was permitted to open a foreign exchange account and a corresponding RMB special account for proprietary funds and client funds respectively and was required to open a foreign exchange account and a corresponding RMB special account for each Open-end China Fund. While this provided for segregation of the QFII's assets from client assets, it meant that for QFII clients other than Open-end China Funds their assets were contained in one omnibus securities account, which invariably gave rise to serious custody and segregation concerns and risks.

Under the 2012 QFII Measures and the 2012 SAFE QFII Rules, the QFII account structure was amended in such a manner as to address some of these concerns regarding custody and asset segregation by permitting a QFII to open up to six "RMB special deposit accounts" for its clients. Further to the implementation of the 2012 QFII Measures and the 2012 SAFE QFII Rules, the rules regarding accounts which can be opened and operated are as follows:

  1. a QFII is required to open a separate segregated securities account for its own proprietary capital;
  2. a QFII is required to open a separate segregated securities account for its clients' assets. Client assets (other than assets of Open-end China Funds and Long-Term Funds) are contained in this single omnibus client account. Such a securities account may be named as "QFII-Client Name";
  3. when a QFII opens a securities account for a Long-Term Fund under its management, the account may be named as "QFII – Fund (or Insurance Fund, etc.) Name" and the assets in that account will belong to the Fund (or Insurance Fund, etc) and shall be independent from the QFII and the custodian.
  4. when a QFII opens a foreign exchange account and a RMB dedicated deposit account for an Open-end China Fund, it shall open a separate account for each Open-end China Fund;

    Accordingly where a QFII opens a separate segregated foreign exchange account in respect of an Open-end China Fund, a corresponding segregated RMB dedicated deposit account and securities account will also be required to be opened. While these separate segregated securities accounts may be opened in respect of individual funds, the accounts will be in the joint name of the QFII and the fund. However, pursuant to the 2012 QFII Measures, the Open-end China Fund will be the sole legal owner of the securities held in the account.
  5. QFIIs may open up to six "RMB special deposit accounts" which are permitted to be linked to a RMB securities account for its clients. Funds are not transferrable between these RMB special deposit accounts. This will allow QFIIs to segregate and distinguish some of its clients' assets from the assets of other clients and address the aforementioned custody and segregation issues for certain clients. This may provide QFIIs with the ability to meet the concerns of clients who are not Open-end China Funds or Long-Term Funds regarding the segregation of their assets from other clients' assets managed by the same QFII.

In summary, the implementation of the 2012 SAFE QFII Rules and the 2012 QFII Measures provide additional flexibility to QFIIs regarding account opening.

For QFII clients other than Open-end China Funds and Long Term Funds, the ability of QFIIs to now open up to six RMB special deposit accounts should assist in addressing the custody and segregation concerns which exist with regard to the assets of various clients of the same QFII being held in an omnibus client account.

To read this Update in full, please click here.

Footnotes

1 The Interim Administrative Measures for Securities Investments in China by Qualified Foreign Institutional Investors (1 December 2002).

2 A-shares are equity shares subscribed and traded in Renminbi. QFIIs have traditionally focused on A-shares traded on the Chinese stock exchanges located in Shanghai and Shenzhen.

3 See footnote 4.

4 The main regulations governing the QFII scheme are the revised "Administrative Measures on Domestic Securities Investment by Qualified Foreign Institutional Investors" issued by the CSRC, the PBOC and the SAFE in 2006 ("2006 QFII Measures") and the Provisions on the Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors issued by the SAFE on 29 September 2009 ("2009 SAFE QFII Rules"). The 2009 SAFE QFII Rules set out detailed provisions on quota applications, remittance and repatriation of funds, QFII accounts, etc.

In 2012, the Chinese regulators sought to broaden the appeal of the QFII scheme to foreign investors. In July 2012, the CSRC issued the "Provisions on Relevant Matters concerning the Implementation of Measures for the Administration of Securities Investment within the Borders of China by Qualified Foreign Institutional Investors" ("2012 QFII Measures"), which revised the "Provisions on Relevant Matters concerning the Implementation of Measures for the Administration of Securities Investment within the borders of China by Qualified Foreign Institutional Investors" issued by CSRC in 2006, while in December, 2012, the SAFE revised its QFII rules by issuing the " Provisions on Foreign-Exchange Administration of Domestic Securities Investment by Qualified Foreign Institutional Investors." ("2012 SAFE QFII Rules").

5 We understand that QFII licences and quotas are specific to each QFII and not transferable between entities, even within a group, however a QFII may delegate the QFII investment management function to another group entity.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.