BIZCHINA / Backgrounder
QFII
(chinaamc.com)
Updated: 2006-09-26 09:49
Q:What is QFII?
A: 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 financial 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 ��C
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. QFIIs can provide their clients with added
opportunities to share in the growth of the Chinese Market.
As of October 14, 2004 a total of 25 foreign institutions have received
QFII licenses with quotas ranging from $50 million to $800 million,
amounting to more than $2.8 billion authorized for investment in the
Chinese markets. China's market capitalization of $500 billion is
increasingly attracting foreign investors and around 10 other foreign
institutions have submitted applications and CSRC approval is pending.
Q: What financial instruments can a QFII invest in?
A: 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.
Q:Who can become a QFII?
A: 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
Q:Who oversees the QFII Program?
A: 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.
The QFII applicant must meet the following criteria:
Sound financial and credit statusRisk control indicators meet the
requirements set by laws and securities authorities under applicant's
home jurisdiction
Sound management structure and internal control system
If a fund management institution:
It must have operated its fund business for over 5 years with the most
recent accounting year managing assets of not less than $10 billion
If an insurance company:
It must have operated its insurance business for over 30 years with
paid-in capital of not less than $1 billion and manage securities of not
less that $10 billion in the most recent accounting year.
If a securities company:
Must have operated securities business for over 30 years with paid-in
capital of not less than $1 billion and manage securities assets of not
less than $10 billion in the most recent accounting year.
If a commercial bank:
It must rank among the top 100 of the world in terms of total assets for
the most recent accounting year and manage securities assets of not less
than $10 billion.
Under new regulations, currently waiting approval by the CSRC,
requirements on investor's qualifications, border securities and
investment percentage, capital remittance and sub-account opening will be
downgraded��C allowing more QFII's to enter the market.
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. The
current QFII investment quotas range from $50 million to $800 million.
There are currently 11 banks in China that are qualified for the
custodian business. They include 7 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,
China Everbright Bank
4 Foreign Qualified Custodians
Standard Chartered Bank, HSBC, Citibank, Deutsche 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. They service foreign exchange and cash settlement needs of
the QFIIs and are in charge of the safekeeping of securities, receiving
of dividend and interest payments, and 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 my SAFE. This capital is then converted into RMB and deposited with
the custodian.
(For more biz stories, please visit Industry Updates)
Chinese Online Class
