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How to apply for your own China QFII: Eligibility requirements and application process

By Henri Arslanian, Director, UBS Prime Services, Business Consulting Services

 

First published in Q1 2013 edition


Since the start of 2013, we have continued to observe a number of positive developments in China that may impact hedge fund managers and, most importantly, hedge fund investors interested in gaining access to the Chinese domestic securities market through the Qualified Foreign Institutional Investor (QFII) scheme. This article outlines the QFII eligibility requirements that an applicant must satisfy and the application process in order to be approved as a QFII.

What is the QFII scheme?

The QFII scheme was launched in 2003 and allows foreign investors to access the Chinese domestic securities market. Such investors need to be approved by the China Securities Regulatory Commission (CSRC) and have obtained an investment quota from the State Administration of Foreign Exchange (SAFE). As of the end of 2012, a total of 207 foreign institutions were approved as QFIIs with a total approved quota of approximately US$37.5 billion.

Many changes have taken place over recent months. These include:

  • In April 2012, a joint decision was made by the People’s Bank of China (PBOC), CSRC and SAFE to bring the total QFII quota from US$30 billion to US$80 billion.
  • In July 2012, the CSRC issued new provisions which lowered the QFII requirements and streamlined the application process.
  • In December 2012, SAFE issues amendments that raised the maximum quota that certain QFIIs can receive (e.g. sovereign funds, central banks) to more than US$1 billion. In addition, as per earlier guidelines issued by the CSRC, the SAFE release also allowed QFIIs to open special deposit accounts for trading index futures.
  • More developments are expected in the coming months.

What are the eligibility requirements?

Eligible investors

Business experience

Capital

Assets under management

Asset management companies

2 years

n/a

US$500 million

Insurance companies

2 years

n/a

US$500 million

Securities companies

5 years

US$500m of net assets

US$5 billion

Commercial banks

10 years

US$300m of tier 1 capital

US$5 billion

Other institutional investors (e.g. pension funds, charity funds, endowment funds, swfs)

2 years

n/a

US$500 million

 

In addition to the above, an applicant shall (i) be in sound financial and credit status; (ii) have professionally qualified employees in its home country; (iii) have a sound governance structure, internal control, compliance and no regulatory record for the past three years; and (iv) have its home jurisdiction regulator entered into a Memorandum of Understanding with the CSRC.

 

Can hedge funds apply to become a QFII?

Whilst hedge funds in theory qualify as Asset management companies, the CSRC has not historically approved any hedge fund as a QFII as they are not commonly seen as long term investors. However, over recent weeks, we have witnessed a number of boutique investment managers (primary long only managers with an additional hedge fund product) be approved as QFIIs. The latest list of approved QFIIs (including those boutique investment managers) can be found here.

 

How much time does the QFII application take?

Whereas the application process previously took anywhere from 9-18 months, our recent experience shows that applications may be typically approved in a 2-3 month horizon. We also understand that certain types of applicants may have priority. These are investors that are perceived as fundamental long term investors such as SWFs, pension funds or endowment funds. A streamlined online application is expected to be ready shortly. At present, an applicant is expected to submit the documentation through the CSRC’s website and hand-in hard copies to the CSRC. The application can be prepared in English but a translated Chinese version needs to be submitted that will be reviewed by the regulators.

 

What are the different steps of the QFII application?

UBS Steps Chart

What is the typical size of the initial quota that a QFII will receive and how quickly the capital needs to be injected?

The minimum application size is US$50 million and the granted initial QFII size depends on a number of factors, but is generally in the US$100 million to US$300 million range for asset management companies.

An approved QFII has six months from the date of its quota approval from SAFE to inject the funds into China. If a QFII fails to inject the full approved amount within six months, and the injected capital is more than US$20 million, the actual injected amount will be deemed as the investment quota. However, if a QFII does not inject a minimum of US$20 million, its entire QFII quota will be cancelled.

 

How long is the lock-up period?

All QFIIs are subject to a lock up period where they are not allowed to remit their investment principal out of China. The lock-up period for the repatriation of the principal is generally one year except for certain type of investors (e.g. pension funds, endowments, government and monetary authorities, insurance funds, charitable funds, and mutual funds) where the lock up is reduced to three months.

A QFII is not allowed to repatriate during the lock-up period. Following the lock-up period, a QFII may repatriate the principal and profits following the approval of SAFE.

 

What documents do I need to submit in my QFII application?

The documents that need to be submitted in the QFII application are the following:

Documents Required by the CSRC

Documents required by SAFE

1.    QFII application letter to CSRC

2.    Application form 

3.    Investment plan 

4.    Copy of business license and financial business license

5.    Copy of Articles of Association of QFII

6.    Summary of internal control policy/procedures of the applicant

7.    Registration form of QFII team 

8.    Statement on the professional qualifications of the key persons

9.    Letter of good standing issued by the applicant’s home jurisdiction.  

10.  Statement of source of funds

11.  Audited financial statements

12.  Power of Attorney to authorized signer 

13.  Draft of custodian agreement

14.  Statement by custodian on whether the applicant is qualified to be a QFII applicant

15.  Summary of the applicant (or its affiliates)’s related entities’ activities within China

16.  Power of Attorney by applicant to custodian

17.  Any other documents required by CSRC

1.    QFII Application letter to SAFE

2.    SAFE registration form for QFII

3.    Investment Plan to SAFE

4.    Application for RMB special account and FX account opening

5.    Statement of source of funds

6.    Letter of commitment not to withdraw the capital during the lock up period

7.    Power of attorney by applicant to custodian

8.    Power of Attorney to authorized signer

9.    Copy of QFII license

10.  Any other documents required by SAFE

 

 

Can I apply for additional quota?

A QFII can apply for additional quota following one year from the previous quota approval. We understand that in granting additional quota, SAFE will consider a number of factors including the utilization of the existing quota and the QFII’s compliance with the existing regulations.

 

What products can a QFII trade?

Stock listed in Stock Exchange

Fixed Income

A Shares (Shanghai, Shenzhen)

 

Government Bond

Enterprise Bond

Corporate Bond

Convertible Bond

Interbank Bond Market

Securities Investment Fund

Equity Derivatives 

Close-ended Fund

Open-ended Fund

Long Only Fund

ETF

Warrant

Index Futures

 

 

 

 

What are the various restrictions with regards to my asset allocation?

We understand that the CSRC has a policy that a minimum of 50% of the assets need to be invested in equities and no more than 20% can be kept in cash. In addition, a QFII may not hold more than 10% of the shares of a listed company and the A shares held by all foreign investors under the QFII regime may not exceed 30% of the shares of a listed company.

henri.arslanian@ubs.com
www.ubs.com

The views expressed are those of the author and do not necessarily represent those of UBS.

 

 

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