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 ˇ§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
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
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 downgradedˇ§C allowing more
QFII's to enter the market.
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
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