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Q1: What is QFII?
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Answer: On November 5, 2002 the China Securities Regulatory Commission (CSRC) and the People's Bank of China (PBOC) introduced the QFII (Qualified Foreign Institutional Investor) program as a provision for foreign capital to access China's capital markets.
Chinese QFII regulations relax some capital controls and allow foreign institutions to invest in RMB-denominated equity and bond markets. Indeed, QFII is a Chinese brokerage business, which allows qualified foreign institutions to trade Chinese A-shares via special accounts opened at designated custodian banks, for their clients.
The QFII mechanism not only further opens China's securities markets, but also gives foreign investors an opportunity to take position on those markets and buy stakes in Chinese companies, thus sharing in China's phenomenal growth. |
Q2: What financial instruments can a QFII invest in?
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| Answer: Shares listed on China's stock exchanges (excluding B shares); Treasuries listed on China's stock exchanges; Convertible bonds and enterprise bonds listed on China's stock exchanges; Other financial instruments approved by the CSRC; Shares held by each QFII in one listed company should not exceed 10% of total outstanding shared of the company (a rule also enforced for domestic investors); Total Shares held by all QFIIs in one listed company should not exceed 20% of total outstanding shares of the company. |
Q3: Who can become a QFII? |
| Answer: Overseas fund management institutions, Insurance companies, Securities companies, other assets management institutions which have been approved by the CSRC. In order to encourage medium and long-term investments, the CSRC stated that it will give preference to institutions managing closed-end Chinese-focused funds, or pension funds, insurance funds and mutual funds with good investment records in other markets |
Q4: Who oversees the QFII Program?
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Answer: The China Securities Regulatory Commission (CSRC) and State Administration of Foreign Exchange (SAFE) are the regulators of the securities investment activities conducted by QFIIs. They are responsible for overseeing all transactions and conducting annual inspections on QFIIs. SAFE is responsible overseeing business tied with foreign exchange operations, such as the approval of the QFII investment quotas, issuance of the foreign exchange certificate, supervision of account management and foreign exchange settlements (as specified in Foreign Exchange Control on Securities Investments in China by Qualified Foreign Institutional Investors Tentative Provisions). The CSRC is the approval authority for QFII status. It interprets the rules regarding QFII and takes the role of a general regulator.
Under new regulations approved by the CSRC, requirements on investor's qualifications, border securities and investment percentage, capital remittance and sub-account opening will be reduced, allowing more QFIIs to enter the market. |
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Application Process
The applicant must mandate a custodian and a broker for their securities trading. The elected custodian files the application for QFII qualification and investment quota to the CSRC and SAFE respectively. Until the end of 2006, there are currently 13 banks in China that are qualified for the custodian business. They include 8 Domestic Qualified Custodians: Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of Communications, China Merchants Bank, Everbright Bank and China Citic Bank；and 5 Foreign Qualified Custodians：Standard Chartered Bank, HSBC, Citibank, Deutsche Bank, DBS Bank.
The custodian bank offers securities and cash clearing services to QFIIs that have received authorization from Chinese regulators. A custodian acts as the primary communication channel between the QFII and the Chinese authorities. It not only services foreign exchange and cash settlement needs of the QFIIs, but also takes charge of the safekeeping of securities, receiving of dividend and interest payments, reporting to the CSRC and SAFE about the status of the account and compiling the QFII's annual report.
After obtaining approval from the CSRC and the investment quota from SAFE, the QFII must remit into China within 3 months the full amount of its initial investment in foreign currency in accordance with the quota set by SAFE. This capital is then converted into RMB and deposited with the custodian. |
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