On June 20, 2012, the China Securities Regulatory Commission (the “CSRC”), aiming to attract more QFII investments, published a draft Regulation Regarding Certain Issues in the Implementation of the Administrative Measures on Onshore Securities Investment by Qualified Foreign Institutional Investors (“Draft Regulation”). The deadline for public comments is July 5, 2012. This alert outlines the notable changes reflected in the Draft Regulation and identifies the major issues relevant to its implementation (once formally adopted).
Since its launch in November 2002, the QFII pilot program has undergone successive expansions, the most notable of which was the enlargement of investment quotas from US$30 billion to US$80 billion announced this past April. However, some of the current regulations, notably the Administrative Measures on Onshore Securities Investment by Qualified Foreign Institutional Investors, and the accompanying Notice Regarding Certain Issues in the Implementation of the Administrative Measures on Onshore Securities Investment by Qualified Foreign Institutional Investors (“Current Regulation”), because of their high thresholds for market entry have been viewed as not encouraging further opening up of the capital markets and attracting more offshore medium and long term capital. The Draft Regulation published by the CSRC intends to address this situation by relaxing the market entry criteria and the operational constraints, expanding the scope of investment, and simplifying and facilitating the administrative processes.
2. Prominent Changes
(i) QFII Market Entry Criteria Lowered
The Draft Regulation substantially lowers the market entry criteria as shown in the chart below.
|Fund Management Institutions
|Other institutional investors (such as pension funds, charitable foundations, endowments, trust companies, sovereign wealth funds, etc.)
(ii) Bond Investment in the Inter-Bank Bond Market
The Draft Regulation allows QFIIs for the first time to invest in bonds traded in Inter-Bank Bond Market (“IBBM”). For illustrative purposes, the types of bond products traded in the IBBM include central government and local government bonds, central bank bonds, policy-oriented and ordinary financial bonds, subordinated bonds, mixed capital bonds, and RMB-denominated bonds issued by international development agencies (such as World Bank, Asian Development Bank) etc.
The Draft Regulation permits QFIIs to participate in the IBBM in addition to current players such as PRC commercial banks, PRC non-banking financial institutions, other Chinese institutional investors as well as approved foreign institutional investors (e.g. Chinese branches of foreign banks, foreign central banks or monetary authorities, and foreign banks participating in RMB settlement for cross-border trade). Opening the IBBM to QFIIs may not only enable QFIIs to improve their performance and attract more foreign capital by diversifying their investments, but also indirectly stimulate the IBBM.
However, quite a few issues related to QFII investments in the IBBM remain to be further clarified by authorities other than the CSRC. For example, the People’s Bank of China may need to address the following questions:
Similarly, the tax authorities may need to clarify whether or how QFIIs can enjoy current preferential treatment applicable to certain bond products traded in the IBBM. For example, interest accrued on local government bonds issued from 2009 through 2011 are exempt from income tax, and income tax is assessed on interest accrued on the Railway Construction Bonds issued from 2011 through 2013 at half the otherwise applicable tax rate. It is therefore expected that some of the current applicable rules may require amendments, or new rules may need to be enacted to govern how QFIIs can participate in the IBBM.
(iii) Shareholding Ceiling Raised
The Draft Regulation raises the ceiling for aggregate shareholdings of all foreign investors in the “A” shares of a listed Chinese company from the current 20 percent to 30 percent. The ceiling for the shareholding of a single foreign investor in the total share capital of a listed Chinese company remains at 10 percent.2
(iv) Securities Accounts3
The Draft Regulation removes the ambiguity surrounding ownership of assets held by a QFII for itself and its clients and facilitates the management of accounts by QFIIs. The Draft Regulation expressly requires a QFII to open separate segregated securities accounts for its own capital and its clients’ capital. An official explanation of the Draft Regulation points out that a QFII will be allowed to open segregated securities accounts for different clients while under the Current Regulation a QFII is required to open one securities account for all of its clients. The Draft Regulation further clarifies that assets in accounts opened for QFII clients belong to the QFII clients and are not the property of the QFII or its custodian.
The Draft Regulation also allows Chinese fund management companies to provide ad-hoc asset management services4 for QFIIs and to open corresponding accounts to facilitate QFII operations.
(v) Engagement of Multiple Securities Companies by QFIIs
QFIIs have been allowed to engage up to three securities companies to trade securities in each of Shanghai and Shenzhen Stock Exchanges. In practice, however, a QFII can only engage one security company in each Stock Exchange because (i) each QFII is only allowed to open one special RMB account and (ii) the Current Regulation requires a one-to-one correspondence of the securities account with the special RMB account. The Draft Regulation abandons this one-to-one correspondence, thereby permitting QFIIs to engage multiple securities companies.
(vi) Electronic filing
To simplify the application and administration processes, the Draft Regulation adopts electronic filing of QFII applications through the CSRC website and requires the reporting of major events to also be made by electronic filing.
The Draft Regulation has responded to many of the suggestions and comments made by industry players. When the Draft Regulation becomes effective, it should help to further attract and facilitate investments made by foreign capital through QFIIs.
In the meanwhile, we note that in the past, the relevant regulators, i.e., CSRC and State Administration of Foreign Exchange, have worked in close coordination with respect to legislative work and other aspects governing QFIIs. It is, however, unclear what actions will be taken by State Administration of Foreign Exchange in response to the Draft Regulation.
Like all other China offices of international law firms, we are legally prohibited from practicing local Chinese law such as by rendering formal legal opinions on matters of PRC law.
作者：叶小玮、Brian D. Beglin、王瑾、刘若珂
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Joseph-Roger
Such measures apply to banks incorporated in China. It is unclear whether tier 1 capital of foreign commercial banks will be calculated based on the above calculation method.
2 Neither the 30 percent ceiling nor the 10 percent ceiling applies to strategic investments made according to the Administrative Measures for Foreign Investors’ Strategic Investment in Listed Companies.
3 We note that securities regulators in the United States interpret the reach of their own jurisdiction broadly, including in connection with “broker-dealer” and “investment adviser” activities. In particular, the US Securities and Exchange Commission takes the position that it has jurisdiction over non-US securities firms when the firms solicit and effect transactions in debt and equity securities (including non-US securities and non-dollar denominated securities) with any US investors, or seek to provide investment advisory services to US investors, including institutional investors such as QFIIs. Therefore, to the extent that a QFII is a US institution, Chinese securities firms, custodial banks, and fund management institutions, should consult with experts in U.S. securities regulation to ensure that accounts for QFIIs are solicited and established in a manner that complies with US regulatory requirements. This is advisable under both the current standards, and the Draft Regulation.
4 Subject to relevant restrictions on investment scope set forth in QFII related regulations, such services shall be conducted according to the Trial Measures for Fund Management Companies to Provide Asset Management Services for Specific Clients.
3 我们注意到，美国证券监管机关对其管辖权进行广义解释，包括其对“经纪交易商”和“投资顾问”行为的管辖权。特别是，美国证券交易委员会认为，如果一家非美国证券公司就债务证券或股本证券（包括非美国的证券和非美元计价的证券）向任何美国投资者发出要约或与任何美国投资者达成交易，或者寻求向美国投资者（包括QFII在内的机构投资者）提供投资咨询服务，美国证券交易委员会即对该非美国证券公司具有管辖权。所以，如果QFII是一家美国机构，则中国境内证券公司、托管银行和基金管理公司应当向精通美国证券监管法律的专家咨询，保证其向QFII发出要约和开立QFII账户的方式符合美国监管要求。无论是根据现行标准还是《规定草案》，这一做法都是明智的。4 以遵守QFII法规内有关投资范围限制为条件，具体服务应根据《基金管理公司特定客户资产管理业务试点办法》的规定进行。
This article was originally published by Bingham McCutchen LLP.