Provisions on Foreign Exchange Control in Connection with Securities Investments in China by Qualified Foreign Institutional Investors

Revised on December 7 2012. Latest revision can be found at:
http://www.chinalawandpractice.com/Article/3152439/Provisions-on-Foreign-Exchange-Control-in-Connection-with-Securities-Investments-in-China-by.html 

(Promulgated by the State Administration of Foreign Exchange on, and effective as of, September 29 2009.)

Announcement of Safe [2009] No.1

Part One: General provisions

Article 1: These Provisions have been formulated pursuant to the PRC Regulations for the Control of Foreign Exchange and the Measures for the Administration of Securities Investments in China by Qualified Foreign Institutional Investors(Order of the CSRC, PBOC and Safe No.36 of 2006) in order to regulate foreign exchange control in respect of qualified foreign institutional investors (QFIIs) in the securities market in China.

Article 2: A QFII shall entrust its domestic custodian (Custodian) to carry out on its behalf the relevant procedures required by these Provisions.

Article 3: QFIIs and Custodians shall comply with relevant Chinese provisions on foreign exchange control.

Article 4: The State Administration of Foreign Exchange, its branches and offices (Safe Bureaux) shall effect in accordance with the law the monitoring, administration and inspection of the investment limits, fund accounts, fund receipt, payment and conversion relating to securities investments in China by QFIIs.

Part Two: Administration of investment limits

Article 5: The state imposes limits on securities investments in China by QFIIs. The State Administration of Foreign Exchange shall be responsible for approving the investment limits of individual QFIIs, so as to encourage medium- and long-term investment.

Article 6: When a QFII applies for an investment limit, and opening of a foreign exchange account and a special renminbi account, it shall submit the following materials to the State Administration of Foreign Exchange:

(1) an application letter submitted by the Custodian and QFII, containing the QFII's basic particulars, an account of the source of the funds, the investment plan, an undertaking by the QFII that it will not withdraw its funds during the lockup period, etc., accompanied by a (Safe) Registration Form for Qualified Foreign Institutional Investors (for details, see Schedule 1);

(2) a photocopy of the Securities Investment Business Permit of a Qualified Foreign Institutional Investor issued by the China Securities Regulatory Commission (CSRC);

(3) a notarised power of attorney from the QFII authorising the Custodian; and

(4) other materials as required by the State Administration of Foreign Exchange.

When a QFII applies to increase its investment limit, it shall, in addition to the materials specified in Items (1) and (4) above, provide its Foreign Exchange Registration Certificate of a Qualified Foreign Institutional Investor (Forex Registration Certificate) and an account of the investments in China for which it already has an investment limit, which shall include details of its asset allocation and changes therein, its investment gains and losses and its performance in legal compliance, the average turnover rate of its stock trading, etc.

Article 7: The investment limit for which a QFII applies may not be less than the equivalent of US$50 million each time and, in the aggregate, may not be more than the equivalent of US$1 billion. The State Administration of Foreign Exchange may revise the aforementioned limits in line with the economic and financial situation, supply and demand in the foreign exchange market, the balance of payments, etc.

A QFII may not apply for an increase in its investment limit again for one year after its previous investment limit is approved.

Article 8: A QFII shall remit the investment principal inward within six months from the date each investment limit is approved, and if it fails to meet such deadline without approval, it may not remit such funds inward. If it fails to remit the funds inward in full by the prescribed deadline, but the amount thereof exceeds the equivalent of US$20 million, the amount actually remitted inward shall serve as its investment limit.

If the principal remitted inward by a QFII is in a currency other than US dollars, the US dollar equivalent of the investment limit shall be calculated with reference to the foreign currency to US dollar conversion rate table posted by the State Administration of Foreign Exchange for the month in question.

Article 9: The lockup period for the investment principal of pension fund, insurance fund, mutual fund, charitable foundation, endowment fund, government, monetary authority-type QFIIs, etc. as well as open-ended China funds promoted and established by QFIIs shall be three months, and that for other QFIIs shall be one year.

The lockup period for the investment principal of QFIIs shall begin to count from the date on which the principal is fully remitted inward. If the principal is not fully remitted by the prescribed deadline, the lockup period shall begin to count after the lapse of six months from the date on which approval of the investment limit was granted.

For the purposes of the foregoing, the term “open-ended China fund” means an open-ended securities investment fund promoted and established abroad by way of a public offering and at least 70% of the fund assets of which are invested in China. Within 20 working days after it promotes and establishes an open-ended China fund, a QFII shall submit the original of the fund prospectus and a Chinese translation of the core contents to the State Administration of Foreign Exchange for the record.

For the purposes of the foregoing, the term “lockup period for investment principal” means the period during which a QFII is prohibited from remitting the investment principal out of China.

Part Three: Account administration

Article 10: A QFII may, on the strength of the official reply document from the State Administration of Foreign Exchange on the investment limit and account opening, open one foreign exchange account and one corresponding special renminbi account with its Custodian for its own funds or the funds of the customers to which it provides asset management services.

If a QFII establishes open-ended China funds, it shall open one foreign exchange account and one corresponding special renminbi account for each open-ended China fund.

The Custodian shall, within five working days after the QFII opens a foreign exchange account and special renminbi account, report the same to the Safe Bureau of the place where it is located for the record, submit the formal custodian agreement to the State Administration of Foreign Exchange and collect the Forex Registration Certificate on behalf of the QFII.

Article 11: The scope of the receipts of a QFII's foreign exchange account shall be the principal remitted from abroad by the QFII, interest income, funds transferred into the account from the QFII's special renminbi account after the purchase of foreign exchange and other receipts approved by the State Administration of Foreign Exchange; and the scope of expenditures shall be funds converted into renminbi and transferred into the QFII's special renminbi account, funds remitted back abroad by the original route and other expenditures approved by the State Administration of Foreign Exchange.

The scope of the receipts of a QFII's special renminbi account shall be funds from the QFII's foreign exchange account converted into renminbi and transferred into the account, proceeds derived from the sale of securities, cash dividends, interest income and other receipts approved by the State Administration of Foreign Exchange; the scope of expenditures shall be the price paid for the purchase of the specified securities-types and other types of products (including stamp tax, handling charges, etc.), taxes, custody fees, auditing fees, management fees and other such taxes and fees, funds used to purchase foreign exchange and transferred into the QFII's foreign exchange account and other expenditures approved by the State Administration of Foreign Exchange.

The funds in a QFII's foreign exchange account and special renminbi account may not be used for purposes other than securities investment in China.

Article 12: Funds may not be transferred among a QFII's account for its own funds, account for customers' funds and account for its open-ended China fund. Funds also may not be transferred among the accounts of a QFII's various open-ended China funds.

Article 13: The deposit interest rates for the foreign exchange accounts and special renminbi accounts of QFIIs shall be handled with reference to relevant provisions of the People's Bank of China.

Article 14: If any of the following circumstances apply to a QFII, it shall convert the assets into cash and close its foreign exchange account and special renminbi account with the Custodian within one month, and its corresponding investment limit shall become null and void simultaneously:

(1) the CSRC has taken back its securities investment business permit;

(2) the investment funds remitted inward within the six months after the approval of its first investment limit are less than the equivalent of US$20 million;

(3) it withdraws investments from China, causing the total of the principal remaining in China to fall below the equivalent of US$20 million;

(4) the State Administration of Foreign Exchange cancels its existing investment limit in accordance herewith; or

(5) another circumstance as specified by the State Administration of Foreign Exchange arises.

The Custodian shall, within five working days after the closing of the QFII's foreign exchange account and special renminbi account, report the same to the Safe Bureau of the place where it is located for the record and return the Forex Registration Certificate to the State Administration of Foreign Exchange.

Part Four: Conversion control

Article 15: Within 10 working days before actually making an investment, a QFII may, based on the investment plan and relevant explanation provided at the time of the application for its investment limit, notify the Custodian to directly convert the foreign exchange funds required for the investment into renminbi and transfer them into its special renminbi account.

If the aggregate of the investment principal remitted inward by a QFII is less than the equivalent of US$20 million, it may not convert the same into renminbi and invest the same.

Article 16: An open-ended China fund may, once the lockup period has expired, carry out the relevant inward or outward remittance of funds on a monthly basis based on the net balance of subscriptions or redemptions each month.

If net redemptions arise, the amount of the principal remitted outward shall be calculated based on the ratio of the QFII's investment principal to losses/gains on the last trading day of the month preceding the outward remittance as confirmed by the Custodian, and such amount shall serve as the limit of the investment funds that may be remitted inward again in future.

If an open-ended China fund experiences net subscriptions and the amount remitted inward and converted into renminbi on each occasion does not exceed the equivalent of US$50 million, the Custodian may directly carry out the relevant procedures on its behalf, and then report the same to the Safe Bureau of the place where the Custodian is located for the record. If an amount exceeds the equivalent of US$50 million, the Custodian must submit an application to the Safe Bureau of the place where it is located on the strength of a photocopy of the Forex Registration Certificate 10 working days in advance, and may carry out the relevant procedures only after receiving the approval of the Safe Bureau of the place where it is located.

If an open-ended China fund experiences net redemptions and the amount of foreign exchange purchased and remitted outward on each occasion does not exceed the equivalent of US$50 million, the Custodian may directly carry out the relevant procedures on its behalf, and then report the same to the Safe Bureau of the place where the Custodian is located for the record. If an amount exceeds the equivalent of US$50 million, the Custodian must apply to the Safe Bureau of the place where it is located on the strength of an application letter, a photocopy of the Forex Registration Certificate and an account of the relevant investment gains/losses 10 working days in advance, and may carry out the relevant procedures only after receiving the approval of the Safe Bureau of the place where it is located.

Article 17: If a QFII, other than an open-ended China fund, needs to purchase foreign exchange and remit the principal outward after the expiration of the lockup period for the investment principal, it shall submit an application to the State Administration of Foreign Exchange on the strength of the following materials:

(1) an application letter;

(2) the original of the Forex Registration Certificate;

(3) an account of the inward remittance of the relevant principal and details of the past investments; and

(4) other materials as required by the State Administration of Foreign Exchange.

After reviewing the same and giving its consent, the State Administration of Foreign Exchange will issue an official reply document and reduce the QFII's investment limit accordingly. The Custodian shall carry out the foreign exchange purchase and outward fund remittance procedures for the QFII on the strength of the official reply document from the State Administration of Foreign Exchange.

Article 18: If a QFII, other than an open-ended China fund, needs to purchase foreign exchange and remit realised aggregate returns outward, it shall, after receipt of the dedicated audit report issued by a China certified public accountant, entrust the Custodian to submit an application to the Safe Bureau of the place where the Custodian is located on the strength of the following materials:

(1) an application letter and relevant supporting documentation evidencing the decision to remit the returns outward;

(2) the original of the Forex Registration Certificate;

(3) the dedicated report on the audit of the investment returns issued by the China certified public accountant

(4) proof of payment of taxes on the returns; and

(5) other materials as required by the Safe Bureau.

After reviewing the same and giving its consent, the Safe Bureau of the place where the Custodian is located will issue an official reply document. The Custodian shall carry out the foreign exchange purchase and outward fund remittance procedures for the QFII on the strength of the official reply document.

Article 19: The Custodian shall accurately record on the Forex Registration Certificate details of the QFII's conversion of funds and receipts and payments in a timely manner.

Article 20: The State Administration of Foreign Exchange may revise the times for the outward remittance of funds by QFIIs, the amount thereof and the deadline for the outward remittance of funds in line with China's economic and financial situation, supply and demand in the foreign exchange market and the balance of payments.

Part Five: Statistics and oversight

Article 21: A QFII shall, within five working days, carry out the procedures for the amendment of its Forex Registration Certificate with, and submit a written report to, the State Administration of Foreign Exchange if:

(1) there is a change in its basic particulars such as its name, person in charge, main shareholders or de facto controller;

(2) it, a main shareholder or its de facto controller has a major penalty imposed by another regulator (including foreign regulators) such that such penalty will have a material impact on the QFII's investment operation or result in its qualifications for the relevant business being suspended or revoked;

(3) there is a change in its Custodian or domestic appointed investment firm (brokerage), or there is a change in relevant material particulars thereof;

(4) there is a change in its account name, bank particulars, etc.

(5) there is a change in the open-ended China fund's prospectus; or

(6) another circumstance as specified by the State Administration of Foreign Exchange arises.

If a QFII replaces its Custodian, the new Custodian shall additionally provide a draft of the newly executed custodian agreement, its basic particulars, an account of relevant details of its asset custody business and the new notarised power of attorney and, within five working days from the date of opening of the foreign exchange account and special renminbi account, it shall submit the formal custodian agreement.

Article 22: A Custodian shall submit relevant accurate statements of a QFII's fund conversions and securities investments in China in accordance with the following provisions in a timely manner:

(1) within two working days after the QFII remits funds outward or inward, or converts or purchases foreign exchange, it shall complete and submit a Form Detailing Outward/Inward Fund Remittances of Qualified Foreign Institutional Investors (for details, see Schedule 2);

(2) within eight working days after the end of each month, it shall submit Monthly Statements (1) and (2) on Securities Investments in China of Qualified Foreign Institutional Investors (for details, see Schedule 3);

(3) within three months after the end of each financial year, it shall submit Annual Financial Statements (1) and (2) on Securities Investments in China of Qualified Foreign Institutional Investors (for details, see Schedule 4) for the previous year audited by a China certified public accountant.

Article 23: The Safe Bureau shall impose penalties in accordance with relevant provisions of the PRC Regulations for the Control of Foreign Exchange and reduce or cancel its investment limit if a QFII:

(1) commits an illegal act of using foreign exchange, such as transferring or selling its investment limit;

(2) provides false information or materials to the Custodian or the Safe Bureau;

(3) fails to carry out investment-related conversion, purchase or payment of foreign exchange in accordance with provisions;

(4) fails to provide relevant information or materials on its fund conversion or securities investments in China as requested by the Safe Bureau; or

(5) otherwise violates foreign exchange control provisions.

Article 24: If a Custodian commits any of the acts set forth below, the Safe Bureau shall impose penalties in accordance with relevant provisions of the PRC Regulations for the Control of Foreign Exchange and, if the circumstances are serious, will, together with the CSRC, revoke its qualifications to act as a Custodian for QFIIs:

(1) it exceeds the investment limit approved by the State Administration of Foreign Exchange or fails to carry out inward remittance of the principal for a QFII on time;

(2) it fails to carry out for a QFII the procedures for the outward remittance of the principal or returns in accordance with provisions;

(3) it fails to open or close a foreign exchange account or special renminbi account for a QFII in accordance with provisions, or fails to carry out for a QFII fund conversion or transfer procedures in accordance with the specified scope of receipts or expenditures of the accounts;

(4) it fails to submit statements and relevant information to the Safe Bureau in accordance with provisions, or fails to report relevant circumstances to the Safe Bureau in accordance with provisions;

(5) it fails to file international balance of payments statistics in accordance with provisions; or

(6) it otherwise violates foreign exchange control provisions.

Part Six: Supplementary provisions

Article 25: The materials submitted to the Safe Bureau pursuant hereto shall be in Chinese. Where both a foreign language version and a Chinese translation are submitted, the Chinese version shall prevail.

Article 26: The State Administration of Foreign Exchange is in charge of interpreting these Provisions.

Article 27: These Provisions shall be effective as of the date of promulgation. The Tentative Provisions on Foreign Exchange Control in Connection with Securities Investments in China by Qualified Foreign Institutional Investors (Announcement of the State Administration of Foreign Exchange No.2 of 2002) and the General Affairs Department of the State Administration of Foreign Exchange, Circular on Operational Issues Relevant to Foreign Exchange Control in Respect of QFIIs (Hui Zong Fa [2003] No.124) shall be repealed simultaneously.

Appendix 1: Schedule 1http://www.safe.gov.cn/model_safe/laws/pic/20091010215709336.doc

Appendix 2: Schedule 2http://www.safe.gov.cn/model_safe/laws/pic/20091010215719428.doc

Appendix 3: Schedule 3http://www.safe.gov.cn/model_safe/laws/pic/20091010215727420.doc

Appendix 4: Schedule 4http://www.safe.gov.cn/model_safe/laws/pic/20091010215735460.doc