Other proposed reforms to the QFII and RQFII programmes include consolidating the regulations into a single ‘qualified investor’ (Qualified Investor) programme, removing the quantitative assets-under-management (AUM) requirements that must presently be met to qualify under the QFII programme, and reducing application processing time. A Qualified Investor will also be able to appoint its affiliated domestic private equity investment fund manager for investment advisory services. 

With these proposed amendments, the Qualified Investor programme revives its ‘pilot testing’ status, allowing the CSRC, the State Administration of Foreign Exchange (SAFE), and the People’s Bank of China (PBOC) to monitor and manage foreign investment into domestic PRC markets in a controlled manner. With the expanded scope of eligible investments, the Qualified Investor programme is also likely to attract interest not only from participants in the capital markets space, but also those in the commodities sector. 

The latest revisions to the QFII and RQFII programmes represent China’s continued push towards internationalising the RMB, and promoting inbound investments. Based on the timelines from previous consultations by the CSRC, we expect that the new provisions could come into force as early as the last quarter of 2019, with the approved commodity futures contracts announced in early 2020.

Considerations for market participants

The QFII and RQFII programmes are open to investors from many jurisdictions, including those from Singapore and the UK. The total available quota for the QFII programme was recently doubled to US$300 billion, with the approval of the State Council, up from the previous US$150 billion.² As of 27 March 2019, only about US$101.4 billion of the QFII quota had been allocated. Approved QFII investors based in Singapore and London were allocated a quota exceeding US$14.2 billion, in roughly equal proportions.

Conversely, under the RQFII programme, RMB 1.94 trillion of the total quota is available, with approximately RMB 661 billion allocated in total. Approved Singapore and London-based RQFII investors were allocated RMB 74.7 billion and RMB 48.5 billion, respectively.³

Institutional investors already qualified under the QFII and RQFII programmes with applicable quotas would be able to invest beyond equities and bonds, into commodity futures. Such investors should be aware of the differences when dealing in notionally physically-delivered commodity futures contracts, compared to dealing in fungible dematerialised products such as bonds and securities.

Such expansion of investment scope further opens up possibilities for commercial banks and financial institutions to offer new products and services, especially to customers in the commodities sector.

Commodity firms that happen to have a dedicated fund management company may now wish to consider applying through such affiliated fund managers for a licence and quota under the Qualified Investor scheme. This could potentially provide them with another avenue for offshore access to the PRC commodity futures markets. However, such firms should be mindful of potential issues that may arise, such as from the interaction between their allocated investment quota and meeting the margin requirements for their positions.

Qualification requirements

Eligible foreign institutional investors include fund management companies, commercial banks, insurance companies, securities companies, futures companies, trust companies, government investment management companies and other asset management institutions. Other types of institutional investors recognised by the CSRC include pension funds, charity funds and endowment funds.

A Qualified Investor will have to appoint an eligible domestic commercial bank to act as a custodian for its assets, as well as a domestic securities or futures company (per applicable laws) to execute its investments in the markets. All applications to the CSRC and the SAFE must be submitted through the custodian bank.

The proposed criteria to apply as a Qualified Investor are that:

1. the applicant is in sound financial condition and has a good credit standing, with proven experience in securities and futures investment;
2. the applicant’s investment managers possess the relevant professional qualifications in its country of domicile (where applicable);
3. the applicant has a sound and effective governance structure, internal control system and compliance management regime, and, in accordance with regulations, appoints a supervisor to oversee the legal and compliance requirements of its investments; and
4. the applicant’s operations are well-managed, and the applicant has not been subject to major regulatory actions from regulatory authorities in the last three years, or since establishment,

as well as any other requirements prescribed by the CSRC in accordance with its prudential regulations.

The processing time for applications to the CSRC and SAFE has been reduced to approximately four weeks, in line with the QFII timelines, as compared to the 16 to 20-week timeline under the RQFII. Viewed alongside the proposed amendments to the monitoring and supervision framework, greater reliance is likely to be placed on domestic commercial banks to conduct the necessary due diligence prior to the submission of applications. Indeed the CSRC, the SAFE or the PBOC would not only be able to take regulatory action against Qualified Investors, but also the custodians, should regulatory breaches occur. It is thus important for Qualified Investors to review and clearly document their relationship with such domestic intermediaries, to reduce the likelihood of future disputes.

Background to the QFII and RQFII programmes

The QFII initiative was established back in 2002, allowing global institutional investors an avenue to invest in the Chinese equities and bonds markets within an approved quota. This was followed by the RQFII programme in 2011, as an expansion to the QFII programme, allowing RQFII quota-holders (initially Hong Kong subsidiaries of Chinese financial institutions only) to invest directly into domestic PRC capital markets with offshore RMB. The key difference between the two is that QFIIs remit foreign currency, which is then converted into RMB, whereas RQFIIs use offshore RMB.

Both programmes have been continuously revised over the years, with progressive relaxation of the restrictions on eligibility, quotas, investment options and the remittance of funds. The RQFII scheme now extends beyond Hong Kong to include, among others, Singapore, Korea and the UK as eligible jurisdictions. More recently, QFII and RQFII investors have been permitted to place foreign exchange hedges on their domestic PRC investments.

In recent years, interest in the QFII and RQFII programmes has waned due to the launch of other access channels, such as the Stock Connect and Bond Connect. The relatively tedious application and onerous compliance requirements, compared to these other channels, have further hampered their attractiveness. Should the proposed amendments come into force, the Qualified Investor programme could see a resurgence in interest.

1. This will therefore not apply to products listed on the Shanghai Gold Exchange (as it is not approved by the CSRC), but would potentially cover gold futures on the Shanghai Futures Exchange.
2. See announcement by the SAFE at www.safe.gov.cn.
3. Statistics for QFII and RQFII extracted from www.safe.gov.cn.