Circular on Issues Relevant to the Implementation of the «Measures for the Administration of Securities Investments in China by Qualified Foreign Institutional Investors»

(Issued by the China Securities Regulatory Commission on August 24 2006 and effective as of September 1 2006.)

Zheng Jian Ji Jin Zi [2006] No.176

Offshore investors, custodians, securities companies, the Shanghai Stock Exchange, Shenzhen Stock Exchange and China Securities Depository and Clearing Corporation Limited:

With a view to improving the work associated with the pilot qualified foreign institutional investor (QFII) projects, we hereby notify you on issues relevant to the implementation of the Measures for the Administration of Securities Investments in China by Qualified Foreign Institutional Investors as follows:

1. In order to apply for QFII status, conditions, such as the following asset scales, shall be met:

(1) a fund management institution shall have been engaged in the asset management business for at least five years and in the most recent financial year shall have had not less than US$5 billion in securities assets under its management;

(2) an insurance company shall have been established for at least five years and in the most recent financial year shall have had not less than US$5 billion in securities assets;

(3) a securities company shall have been engaged in securities business for at least 30 years, have
paid-in capital of not less than US$1 billion and in the most recent financial year shall have had not less than US$10 billion in securities assets under its management;

(4) a commercial bank, in the most recent financial year, shall have a top 100 world-wide ranking of total assets and not less than US$10 billion in securities assets under its management; or

(5) another institutional investor (pension fund, charitable foundation, endowment fund, trust company, government investment management company, etc.) shall have been established for at least five years and in the most recent financial year shall have had not less than US$5 billion in securities assets under its management or held not less than US$5 billion in securities assets.

2. When applying for QFII status, the following application documents shall be submitted to the CSRC (one original and one duplicate):

(1) an application form (Appendix 1);

(2) a form listing the basic particulars of the main persons-in-charge (Appendix 2);

(3) an investment plan;

(4) an explanation of the source of the funds;

(5) a statement on whether the applicant has had major penalties imposed by the regulatory authority in the most recent three years;

(6) (a photocopy of) the business licence issued by the country or region where it is located;

(7) (a photocopy of) the finance business permit issued by the regulatory authority of the country or region where it is located;

(8) (a photocopy of) its articles of association;

(9) the draft of the custody agreement to be executed with the custodian;

(10) audited financial statements for the most recent three years; and

(11) other documents required by the CSRC.

If the documents specified in the preceding paragraph are signed by the authorized representative of the legal representative of the applicant (the term “legal representative” means the natural person, e.g. chairman of the board or chief executive officer, etc., who, as authorized by the board of directors of the applicant or in accordance with the applicant's articles of association or the laws of the country or region where the applicant is located, may represent the applicant in handling matters relating to the administration of securities investments in China by QFIIs), the power of attorney issued to the authorized representative by the legal representative shall be presented.

The power of attorney and the documents specified in Items (6), (7) and (8) of the first paragraph shall require a notarial certificate issued by a notary office or lawyer statutorily recognized by the country or region where the applicant is located or authentication by the embassy or consulate of the People's Republic of China in such country. Any of the documents specified in Items (3), (4) and (5) of the first paragraph written in a foreign language shall be accompanied with a Chinese translation.

The applicant shall submit the formal custodian agreement to the CSRC within five working days after the opening of its special renminbi accounts.

3. The securities investment business permit of a QFII shall be valid in perpetuity, unless otherwise specified in laws or regulations or by the CSRC or the CSRC revokes its permit in accordance with the law.

4. When applying for QFII custodian status, the following application documents shall be submitted to the CSRC (one original and one duplicate):

(1) an application form (Appendix 3);

(2) custodian status application (bearing the applicant's official seal or signed by its legal representative);

(3) (a photocopy of) the official reply indicating that the China Banking Regulatory Commission consents to the applicant's engagement in the custodial service for securities investments in China by QFIIs;

(4) (a photocopy of) the duplicate of the applicant's finance business permit and (a photocopy of) the duplicate of its business licence;

(5) proof of its paid-in capital;

(6) basic particulars of its domestic custody department (including human resources, security assurance measures, etc.);

(7) management rules and regulations for the custody business (mainly including the custody business management measures, internal risk control system, job responsibilities and operating rules, employees' code of conduct, accounting measures and information system management system, etc.);

(8) an explanation of having an efficient, rapid, secure and reliable technical system and the relevant supporting documentation; and

(9) other documents required by the CSRC and SAFE in line with the requirements of prudent regulatory principles.

5. The custodian of a QFII must be replaced if:

(1) the QFII has sufficient reason to believe that replacing the custodian would be in its interests; or

(2) the CSRC and/or SAFE determine(s), in line with prudent regulatory principles, that the custodian cannot continue to perform its custodial duties and responsibilities.

The incoming and outgoing custodians shall report relevant information to the CSRC and SAFE for the record within three working days after the outgoing custodian finishes its service.

6. A QFII shall appoint its custodian to apply to the China Securities Depository and Clearing Corporation Limited (CSDC) to open several securities accounts. The securities accounts applied for shall correspond one-to-one with the special renminbi accounts approved by SAFE.

The QFII shall open and use its securities accounts in accordance with the operational rules of the CSDC and be responsible for management of such accounts.

7. A QFII shall apply to open securities accounts in its own name. If it provides asset management services to customers, it shall open nominal holder accounts. The QFII shall report on the investments of the beneficial owners of the nominal holder accounts in accordance with requirements (Appendix 4).

8. When a QFII applies to open a securities account for long-term funds under its management, such as a public foundation, insurance capital, pension fund, charitable foundation, endowment fund and government investment funds, the account name may be in the form “QFII + fund (or insurance capital, etc.).” The account assets shall vest in the “fund (insurance capital, etc.)” and be independent from the QFII and custodian.

9. A QFII may invest in the following renminbi-denominated financial instruments within its approved investment limit:

(1) shares listed and traded on a stock exchange;

(2) bonds listed and traded on a stock exchange;

(3) securities investment funds;

(4) warrants listed and traded on a stock exchange; and

(5) other financial instruments permitted by the CSRC.

A QFII may participate in new share offerings, offerings of convertible bonds and subscriptions to subsequent offerings and rights issues.

10. The securities investments in China by offshore investors shall comply with the following limitations on shareholding percentages:

(1) the shares of a listed company held by a single offshore investor through a QFII may not exceed 10% of the company's total shares; and

(2) the total of the holdings of the A shares of a single listed company by all offshore investors may not exceed 20% of such company's total shares.

If an offshore investor makes a strategic investment in a listed company pursuant to the Measures for the Administration of Strategic Investments in Listed Companies by Foreign Investors, its strategic investment shareholding shall not be subject to the aforementioned limitations.

11. If the securities investments in China by an offshore investor reaches a level that triggers information disclosure requirements, as a party with an information disclosure obligation, it shall disclose information to the stock exchange through the QFII. The QFII is under obligation to ensure that the offshore investors under its name strictly abide by relevant provisions on information disclosure.

12. A QFII may itself exercise or appoint its custodian, a domestic securities company, the secretary of the board of directors of the listed company in question, an independent director of the listed company in question or an offshore investor under its name to exercise its shareholder's rights.

13. When a QFII is to exercise its shareholder's rights, it shall present the following supporting documents to the listed company:

(1) the original or a photocopy of its securities investment business permit;

(2) the original or a photocopy of its securities account card;

(3) the proof of identity of the person who will actually exercise the rights; and

(4) if the QFII has authorized another party to exercise its shareholder's rights, a power of attorney signed by the authorized representative shall be provided in addition to the aforementioned materials (if the QFII authorizes an offshore investor under its name to exercise its shareholder's rights, it shall provide an appropriate shareholding statement signed by the QFII's authorized representative).

14. A QFII, as a nominal holder, may, based on the shareholdings of the offshore investors under its name, cast part of the votes or divide its votes.

15. Each QFII may appoint three domestic securities companies to carry out securities trading on the Shanghai Stock Exchange and three on the Shenzhen Stock Exchange.

16. This Circular shall be effective as of September 1 2006.

Appendices:

1. Application form for the status of qualified foreign institutional investor

2. Form listing the basic particulars of the main persons in charge

3. Application for qualifications to act as a custodian for qualified foreign institutional investors

4. Quarterly statement for nominal holder accounts (contents and format)