Opening up the market for QFII investment in China's securities market

The maximum investment quota available to a single QFII has been increased from US$800 million to US$1 billion while the minimum quota remains at US$50 million. A QFII may not apply for a quota increase within one year from the approval of its current quota. A QFII is required to remit the investment amount within six months from the date the quota is granted

The total QFII investment quota will remain unchanged at US$30 billion. It is worth noting that this was increased from the previous total of US$10 billion following the China-US Strategic Economic Dialogue in 2007-2008. As at August 2009, approximately US$15 billion-worth of quota has been granted by Safe.

ii. Lock-up period shortened

The Provisions have reduced the lock-up period for medium- and long-term investors, such as pension funds, insurance funds, mutual funds and open-ended Chinese funds from one year to three months, while other QFII investors will still be subject to the original one-year lock-up.

Safe stated that this change was aimed at encouraging more medium- and long-term investment to invest in China although the total QFII quota of US$30 billion amounts to only a small percentage of the overall size of the Chinese stock market.

iii. Transfer and sale of investment quota prohibited

QFIIs are expressly prohibited from transferring/selling their quotas under the Provisions. If it is found that a QFII has engaged in “an act of unlawful use of foreign exchange” as stipulated by the Provisions, the QFII's approved investment quota could be reduced or cancelled.

iv. Account management and segregation

A QFII may set up separate accounts for its own funds (proprietary account) and for funds of their clients (client account). Separate accounts must also be opened for each open-ended Chinese fund. One corresponding special renminbi account may be opened for each of the aforesaid accounts. A QFII is prohibited from transferring funds between any of the above-mentioned accounts. With an FX account and a special renminbi account, QFIIs will not be required to convert their foreign exchange into renminbi immediately upon its remittance into China and can only convert the investment amount within 10 working days before the securities investment.

Implications for foreign investors
The Provisions are good news for foreign investors looking to continue and/or increase their investment in the Chinese stock market. The government continues to open up the China financial markets to global participants, and the new changes will make it possible for large investors to channel more portfolio investments into China's capital markets. Medium- and long-term institutional investors are now subject to a shorter lock-up period which could in turn encourage more China investment and resource allocation from them. The approval of a large number of QFIIs (as well as the accelerated of approvals) by the CSRC in 2008 and 2009 is also positive news for foreign investors looking to secure their QFII status to participate in the promising Chinese capital markets.

It is unlikely that the total quota of US$30 billion will be increased anytime soon, as less than half of that amount has been used to date.

One very important point for QFIIs to note is that the new quota transfer/sale prohibition and the potentially devastating consequences of failing to comply with such rules – reduction of their existing quota and the possible cancellation of their QFII status.

Looking ahead
It is interesting to note that some economists and commentators see the issue of the Provisions as part of the Chinese government's attempt to further implement the internationalisation of the renminbi as the QFII quota increase could increase cross-border circulation. The QDII scheme could also therefore be expanded to enable more outflow of renminbi to quicken its pace of internationalisation.

As China continues to open up and internationalise its financial markets, foreign investors can look forward to more favourable rules from Chinese regulators in the foreseeable future.

Hubert Tse, Yuan Tai PRC Attorneys