QDII Fund Management Companies

The Trial QDII Measures have been issued to regulate investment in overseas securities markets by qualified Chinese FMCs and securities firms. Prior to the release of the measures, only banks and trust companies could invest in overseas securities under the QDII scheme.

In accordance with Article 6 of the Trial QDII Measures, in addition to possessing the general QDII qualifications (stable finances, sound governance and internal control, experienced management and no record of violations in the last three years); an FMC needs to “have net assets of not less than RMB200 million; it has been engaging in securities investment fund management business for at least two years; and, as at the end of the most recent quarter, it had assets under its management of not less than RMB20 billion or the equivalent in foreign exchange assets”.

It is understood that the CSRC has set the qualification threshold relatively high in order to ensure a successful start for this groundbreaking outbound investment scheme for Chinese FMCs. The CSRC expects that around 20 FMCs would secure the QDII qualifications in the short term.

Permitted Investments

QDII FMCs are allowed to invest in equities, debt securities, bonds, bank deposits and derivatives. They are not, however, allowed to invest in property and precious metals, nor to underwrite securities.

QDII FMCs are permitted to invest in more diversified financial products under the Trial QDII Measures than their QDII bank counterparts. The China Banking Regulatory Commission [CBRC] issued regulations earlier this year requiring QDII banks to invest up to half of their overseas investment in equities.

Investment Quota

The investment quota is not set out in the Trial QDII Measures ¡V this is decided and approved by SAFE. For the four FMCs which have already launched their QDII fund products, a quota of US$5 billion were issued to each of them by SAFE. It is understood that this $5 billion quota was set after an agreement was reached between CSRC and SAFE and that all QDII FMCs are entitled to secure this US$5 billion quota from SAFE under the QDII scheme in the foreseeable future.

Offshore Advisor and Custodian

According to the Trial QDII Measures, a QDII may appoint an overseas investment consultant (OIC) that has been approved to engage in investment management business by the local regulatory authority, and the local securities regulatory authority has executed a bilateral regulatory cooperation MOU with the CSRC and it has engaged in the investment management business for at least 5 years and in the most recent financial year it had securities assets under its management of not less than US$10 billion (Article 14).

Under Article 17, when an OIC is made responsible for making investment decisions, the agreement must specifiy that the OIC shall bear joint liability in the event that the property suffers a loss as a result of negligence, failure to perform its duties, or any errors on the part of the OIC.

A QDII must appoint a domestic Chinese commercial bank with securities investment fund custody qualifications as the custodian of its assets, and the onshore custodian may appoint an offshore asset custodian to hold custody of overseas assets. The offshore asset custodian must have paid-in capital of not less than US$1 billion or assets in its custody of not less than US$100 billion. In accordance with Article 21, the domestic custodian shall be jointly liable for any losses that are the fault of the offshore custodian.

QDII ¡V Objectives and Future Opportunities

The Trial QDII Measures have been issued as part of the CSRC's goal to increase investors' confidence, nurture the growth and development of domestic securities institutions, and to enable Chinese securities institutions to gain familiarity with global finance and practices in international capital markets, which could help the further development and internationalization of the Chinese financial services sector. The new measures could also help reduce excessive liquidity in the Chinese stock market, diversify risks and investment for Chinese investors and reduce pressure for RMB appreciation.

As the QDII scheme continues to expand and more QDII products are developed, Chinese and foreign financial institutions will have more and more opportunities to participate in China's visionary outbound investment program.