Investment regulation - China - Part 2
Qualified Foreign Institutional Investors (QFI)
Background
In September 2020, the China Securities Regulatory Commission (CSRC), the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) officially released the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors (QFII) and RMB Qualified Foreign Institutional Investors (RQFII). CSRC also released the Provisions on Issues Concerning the Implementation of the Measures for the Administration of Domestic Securities and Futures Investment by QFIIs and RQFIIs. After the release of these new regulations, the previous separate QFII and RQFII Measures and Provisions are integrated into one set. A foreign institutional investor is only required to submit the application once for both the QFII and RQFII (hereinafter collectively, “QFI”) to invest with foreign currency or offshore RMB funds.
Eligibility applicant
- Foreign fund management institutions;
- Commercial banks;
- Insurance companies;
- Securities companies;
- Futures companies;
- Trust companies;
- Government investment management companies;
- Sovereign funds;
- Pension funds;
- Charity funds;
- Endowment funds;
- International organisations;
- Other institutions recognised by the CSRC.
Investment procedures
QFI applicants must provide the following documents:
Document | Notarised | Chinese translation |
CSRC Application form | No | Yes |
Power of Attorney to the person who signs the document | Yes | Yes |
Letter of Authorisation to Custodian Bank | Yes | Yes |
Photocopies of QFI applicant's Business License region of domicile. in the country or region | N/A | Yes |
Photocopies of the financial business permission certificate issued by the local monetary authorities | Yes | |
Other documents required by CSRC |
QFI applicants shall, via their custodians, submit the documents that support their application for QFI status to the China Securities Regulatory Commission (CSRC) and their investment quota to the State Administration of Foreign Exchange (SAFE). Normally, CSRC shall notify their approval within 20 business days from the date on which the full set of application documents is accepted.
A Securities and Futures Business Licence will be issued to approved QFIs.
Once the Securities and Futures Business Licence has been obtained, the QFI custodian can file the application with the (People’s Bank of China) PBOC to apply a basic RMB deposit account and open a special RMB deposit account for the QFI. The custodian also applies on behalf of the QFI for a securities account with CSDCC.
Remittance and pre-funding
QFI can base on their investment needs, inject funds in foreign currency (FCY), Renminbi (RMB), or both.
QFI who only inject funds in FCY need to open the FCY account(s) and the corresponding RMB Special Deposit Account(s). QFI who only inject funds in RMB need to open the RMB account(s).
QFI who inject funds both in RMB and FCY needs to open the RMB account(s), the FCY account(s) and the corresponding RMB account(s)respectively.
The currency of QFI’s outward remittance should be in-line with that of the inward remittance related to domestic securities and futures investment. Cross-currency arbitrage is prohibited.
Regulatory management
QFIs must notify CSRC and SAFE within five days of the following events:
- Change of custodian, authorised representatives or controlling shareholders;
- Adjustment of registered capital;
- Acquisition or merger of other entities;
- Litigation and other significant events;
- Injunction outside the People’s Republic of China (PROC);
- Other circumstances as stipulated by the CSRC and SAFE.
The QFI must apply to renew its Securities and Futures Business Licence, if:
- It changes its business name;
- Mergers with or acquisition by other companies;
- Other circumstances as stipulated by the CSRC and SAFE.
The QFI must surrender its Securities and Futures Business Licence if:
- Its authorised entities are disposed of;
- It enters into bankruptcy procedures and its assets are taken over by the receivers;
- Its Securities Investment Business Licence becomes invalid (i.e. either the QFI has not obtained its Foreign Exchange Registration Certificate within one year of receiving the investment license;
- Where there is a serious breach of regulations or other circumstances as stipulated by the SAFE.
Non-compliance
The SAFE and its branches and Foreign Exchange Administration Department must, as required by law, conduct supervision, administration and inspection of investment quota (hereinafter called “investment quota”), foreign exchange account, cash receipt and payment, and foreign exchange in relation to domestic securities investment by the QFI. CSRC and SAFE may, according to law, require QFIs, custodians, securities companies and other institutions to provide relevant information of QFIs, and may make necessary enquires and examination.
Penalties and fines imposed on QFI and custodian banks
In the event that QFIs do any of the following, SAFE shall, in accordance with the Regulations of the People's Republic of China on Foreign Exchange Administration and relevant regulations, impose a penalty and may reduce the QFI's investment quota to the point of cancellation:
- Transfer or sell its investment quota or other unlawful foreign exchange behaviour;
- Provide fictitious information or material to the custodian or to SAFE;
- Proceed with foreign exchange related to repatriation or remittance without following the rules;
- Fail to comply with SAFE’s requirements while providing information or material related to foreign exchange and domestic securities investment;
- Engage in activity that violates any other foreign exchange rules.
In the event that the custodian commits any of the following activities, SAFE shall, in accordance with the Regulations of the People's Republic of China on Foreign Exchange Administration and relevant regulations, impose a penalty. For serious instances, SAFE shall, together with CSRC, terminate the custodian’s qualification:
- Remit the principal exceeding the investment quota approved by SAFE or after the required timeframe (that is, after six months upon the investment quota approval);
- Repatriate the principal and profit on behalf of QFIs without following the rules;
- Open/close foreign currency and RMB accounts without following the rules;
- Proceed with foreign exchange or transfer of funds without following the rules stipulating the income and expenses of account;
- Fail to submit reports and relevant information to SAFE in accordance with relevant rules or to report relevant conditions to SAFE according to related rules;
- Fail to report the balance of international payment statistics according to relevant rules;
- Engage in activity that violates any other foreign exchange rules.