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Markets and Securities Services |
Asia
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starts to run once an aggregate USD20 million
has been paid into the QFII’s account with the
onshore custodian, rather than once the full
amount of the quota has been remitted as
was previously the case, which will shorten the
lock-in period in practice. Following the expiry
of the lock-in period, there are restrictions and
quotas for withdrawing and repatriating assets.
Daily repatriation of funds is permitted provided
that monthly aggregate repatriation does not
exceed 20% total onshore commitment as at the
end of the previous year. Repatriation of principal
is permitted only on application to SAFE (except
in the case of Open-end China Funds, which do
not need to seek approval). This and the other
capital-mobility restrictions applicable to the
QFII Scheme generally has been a long-standing
cause for concern for many investors, and MSCI
has indicated that concerns surrounding lock-in
must be appropriately resolved before China
A shares can be included in any MSCI indices.
At the moment, it looks as though nothing short
of a complete revocation of the 20% monthly
repatriation limit will satisfy MSCI.
Investment restriction
Various restrictions applicable to holdings in
China A shares will, by extension, also apply to
QFII holdings of China A shares. In brief, these
restrictions comprise:
• A single QFII may not hold more than 10%
of the total outstanding shares in a single
company issuing China A shares.
• The aggregate foreign shareholdings in a
company issuing China A shares must not
exceed 30% of total outstanding shares.
The 2016 changes to the QFII scheme may assist
US and UK managers in getting comfortable
with accessing China’s market. With the 2016
updates to the scheme, China appears to be
demonstrating a commitment to addressing at
least some of the issues that have so far limited
the appeal of the QFII scheme to Western retail
funds. The potential future appetite to apply
for a QFII and RQFII quota in the context of the
developments of the stock connect schemes
is the subject of much debate. While we could
debate this topic for some time, it really is a
matter of watching this space at this point.
RQFII
RQFII is substantially similar to the QFII
regime but focuses on making it easier to
invest renminbi held outside China in Chinese
securities. The principal difference between
the QFII and RQFII regimes is that under the
RQFII regime, funds are remitted into China
in RMB, rather than in any foreign currencies,
although funds can be repatriated in any
freely exchangeable foreign currency. Recent
amendments made in September 2016 were
designed to reconcile with the QFII rules and
promote alignment between the schemes.
Financial institutions in 17 countries have now
been granted RQFII quotas including the UK,
France, Singapore, Canada and Australia. The
US was granted a quota this summer, but at the
time of writing, we understand no US houses
have taken up this opportunity as yet. The total
quota allocation is now RMB514.988 billion.
So far 10 countries have used part of their
quotas, the greatest take-up by far from
institutions in Hong Kong, South Korea and
Singapore, with the UK taking fourth place.
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Background and eligibility
Applicants for an RQFII licence must:
• Have a relevant asset management licence.
• Be in a stable financial condition and have
a good credit standing.
• Have an effective corporate governance
and internal control system, and its relevant
professionals must satisfy eligibility
requirements applicable under local law.
• Not have had any material penalty imposed
by the relevant local regulator since its
establishment (if it has a track record period of
less than three years) or in the last three years.
• And satisfy such other requirements of CSRC
as it may stipulate in accordance with the
principle of prudential regulation.
The 2016 changes did not affect these
requirements.
Investment quotas
As for the QFII regime, the position previous to
the 2016 rule updates was that prior approval
from SAFE for the relevant quota was required
before any investment in the PRC could be
made.
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A similar relaxation has now been
applied to RQFII, as set out above.
Mandatory investment and lock-in periods
Unlike the position for QFIIs, open-ended funds
managed by RQFIIs may remit and repatriate
capital without restriction. That said, the
expectation is that the investment quota for