On March 1, 2013, the China Securities Regulatory Commission (the “CSRC”), the State Administration of Foreign Exchange and the People's Bank of China, aiming to further promote Renminbi (“RMB”) internationalisation, deepen the Chinese Mainland capital markets and support Hong Kong as an international financial center, substantially expanded the Renminbi Qualified Foreign Institutional Investor (“RQFII”) program, by promulgating the Pilot Measures on Securities Investment in Mainland China by Renminbi Qualified Foreign Institutional Investors (the “New RQFII Measures”). On the same day, to support the implementation of the New RQFII Measures, the CSRC promulgated the Provisions on the Implementation of the Pilot Measures on Securities Investment in Mainland China by Renminbi Qualified Foreign Institutional Investors (together with the New RQFII Measures, collectively, the “New RQFII Law”).
The RQFII program has been popular with market players and investors since its inception in December 2011. The total RQFII investment quota has now reached RMB 270 billion (approximately USD 43.4 billion). However, the RQFII regime has lagged behind market needs and investment trends, especially compared to the Qualified Foreign Institutional Investor (“QFII”) program.
The New RQFII Law supersedes certain of the regulations published in 2011 in relation to the RQFII program (the “2011 Regulations”) and implements various changes. In particular, the New RQFII Law expands (i) the scope of RQFII eligible institutions, (ii) the geographic source of RMB funds that may be used by RQFIIs for their investments in China, and (iii) the types of investments that may be made by RQFIIs. This alert will briefly introduce the major changes effected by the New RQFII Law.
Under the 2011 Regulations, only Hong Kong subsidiaries of Chinese fund management companies and securities companies were eligible to receive a license and quota under the RQFII program. The New RQFII Law expands the scope of eligible institutions to further include: (i) Hong Kong subsidiaries of Chinese commercial banks and insurance companies, and (ii) other financial institutions that are registered and mainly operated in Hong Kong (regardless of where their parents are incorporated). The New RQFII Law also provides that the list of the types of Chinese institutions that may participate through their Hong Kong subsidiaries is not an exhaustive list.1
Although entities eligible to receive an RQFII license and quota must still be Hong Kong registered institutions, the RQFII program is now effectively open to a much wider range of eligible participants, particularly given that almost all prominent international financial institutions have subsidiaries in Hong Kong. RQFIIs will need to hold an appropriate license from the Hong Kong Monetary Authority (“HKMA”) or the Hong Kong Securities and Futures Commission (“SFC”) depending on the nature of their activities. For example, in order to provide asset management services to a fund, a Type 9 license from the SFC to carry on asset management activities will be required.
Among the various changes to the qualifications applicable to RQFII applicants, the New RQFII Law clarifies that RQFII applicants do not need to have been in business for at least three years. It is now stipulated that RQFII applicants must not have been subject to any severe penalty by regulatory authorities in their jurisdiction during the previous three years or, if shorter, the period since the RQFII’s establishment.
Under the 2011 Regulations, only RMB funds “raised in Hong Kong” could be used for investment in the Chinese securities markets under the RQFII program. The New RQFII Law provides that RQFIIs can now “use” RMB funds outside of China for the purposes of investing in the Chinese securities markets.
Under the 2011 Regulations, RQFIIs were required to ensure that at least 80% of the funds was invested in bonds and other fixed income securities and no more than 20% of the funds was invested in stocks or stocks investment funds. This requirement was not enforced in relation to RQFII ETFs established under the second phase of the RQFII program from April 2012, and has now been eliminated under the New RQFII Law. RQFIIs can now invest in the same types of products as QFIIs and therefore the products eligible for investment by RQFIIs (and QFIIs) now include:
Other restrictions on securities investments in Mainland China by RQFIIs are also identical to those applicable to QFIIs. With respect to investment in stocks of listed Chinese companies, the ceiling for the shareholding of a single foreign investor in the total share capital of a listed Chinese company is 10%, and the ceiling for aggregate shareholdings of all foreign investors in the “A” shares of a listed Chinese company is 30%.3
Although RQFIIs and QFIIs have been theoretically allowed to engage up to three securities companies to trade securities in each of the Stock Exchanges, in practice they were able to engage only one securities company in each Stock Exchange due to the requirement that an RQFII or QFII was required by the CSRC to maintain a one-to-one correspondence of its securities account with its special RMB account.4 On July 27, 2012, the CSRC amended the QFIIs program to enable QFIIs to engage multiple securities companies by abandoning the “one-to-one correspondence” rule. The New RQFII Law implements an equivalent change for RQFIIs in this regard.5
Under the 2011 Regulations, the Chinese parent companies of RQFIIs were required to meet certain specific requirements. For example, (i) the Chinese parent of an RQFII applicant was required to hold a Chinese securities asset management business license, (ii) the Chinese parent of an RQFII was required to strengthen its risk management over its RQFII subsidiary, and (iii) certain information about the parent of an RQFII applicant (in addition to the shareholding structure of the RQFII applicant) was required to be disclosed when the RQFII applicant applied for its RQFII license and quota. The CSRC appears to have changed its perspective and has removed these requirements. In light of these changes, the current administrative burdens imposed on RQFIIs (and their parents) by the Chinese regulators are broadly similar to those applicable to QFIIs (and their parents).
The New RQFII Law does not affect RQFII-related foreign exchange control matters and other ancillary issues (such as issues related to RMB fund accounts of RQFIIs). The existing ancillary regulations are not fully consistent with the New RQFII Law. For instance, the “one-to-one correspondence” discussed in above Item C (ii) is also set forth in the Notice on Issues Concerning the Depository and Clearing Business Related to Domestic Securities Investment by RMB Qualified Foreign Institutional Investors of Fund Management Companies and Securities Companies effective as of February 15, 2012. We expect that the CSRC will coordinate with other regulators to fully effect and facilitate the changes brought by the New RQFII Law in due course.
The New RQFII Law is expected to further boost the Chinese Mainland’s capital markets and the Hong Kong asset management sector, by strengthening the capacity of the RQFII program to compete with other similar programs.
1 The term used in the New RQFII Law is “Hong Kong subsidiaries of Chinese fund management companies, securities companies, commercial banks, insurance companies, etc.”
2 RQFIIs (and QFIIs) are allowed to subscribe for initial public offerings of stocks, offerings of convertible bonds, and follow-on offerings of stocks and subscription of allocated stocks.
3 Neither the 10% nor the 30% ceiling applies to strategic investments made according to the Administrative Measures for Foreign Investors’ Strategic Investment in Listed Companies.
4 Previously, each RQFII (or QFII) was permitted to open only one special RMB account in Mainland China. Since a securities account of an RQFII (or QFII) in respect of a Stock Exchange was required to correspond with only one special RMB account, an RQFII (or QFII) was able to open only one securities account for each Stock Exchange and therefore could only engage one securities company to manage such securities account.
5 Certain elements of the existing regulations issued by the Chinese regulators other than the CSRS will need to be updated to fully implement this change – see item D.
5 中国证监会之外的中国其它监管部门颁布的现行规定中有些内容需要更新，以充分落实上述修改。请参见 D。
This article was originally published by Bingham McCutchen LLP.