Alternative Investment Management Association
Matthias Feldmann, Partner, TieCheng Yang, Foreign Legal Consultant, and Mark Shipman, Partner
Shortly after China launched the Renminbi Qualified Foreign Institutional Investor (RMB QFII) Scheme in December 2011, the State Administration of Foreign Exchange and the People's Bank of China issued their own circulars to elaborate on the implementation of the scheme. On a practical front, as of the first week of February 2012, the Hong Kong Securities and Futures Commission has approved 18 RMB QFII funds, most of which have already been launched on the market.
With the joint promulgation of the Pilot Measures for Onshore Securities Investment by Fund Management Companies and Securities Company that Qualify as RMB Qualified Foreign Institutional Investors (Pilot Measures) by the CSRC, PBOC and SAFE and the issue of corresponding implementing rules by CSRC (CSRC Implementing Rules), the long-awaited Renminbi Qualified Foreign Institutional Investor (RMB QFII) scheme was finally launched in China on 16 December 2011. Thereafter, each of SAFE and PBOC also elaborated on their respective implementation of the Pilot Measures through the promulgation of a circular on 23 December 2011 and 4January 2012 respectively (SAFE Circular and PBOC Circular).
The Pilot Measures apply to the Hong Kong subsidiaries of fund management companies and securities companies incorporated in Mainland China (HK Subsidiaries) in relation to their raising of RMB funds in Hong Kong for investment in the domestic securities market in Mainland China. Upon obtaining a RMB QFII licence from CSRC and an investment quota from SAFE, a HK Subsidiary can invest in the securities market of Mainland China within the approved RMB investment quota. This means that the net RMB funds which the HK Subsidiary remits into China for investment purposes must not exceed this quota. Similar to the traditional qualified foreign institutional investor regime (QFII Regime), an approved HK Subsidiary must engage a qualified onshore commercial bank as its custodian and onshore securities companies as its brokers for securities trading. Pursuant to the Implementing Rules, up to three brokers may be appointed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange respectively. Additionally, a HK Subsidiary may, but is not obliged, to engage Mainland China fund management companies or securities companies to manage its onshore securities investment portfolio.
The CSRC, PBOC and SAFE jointly regulate the RMB QFII scheme from different angles. Their respective duties and authorities are summarised below:
CSRC · regulates onshore securities investment by HK Subsidiaries · reviews and verifies applicants' eligibility and issues RMB QFII licences PBOC · regulates onshore RMB accounts opened by HK Subsidiaries · regulates investment by HK Subsidiaries in the money markets · monitors and regulates the remittance and repatriation of RMB funds jointly with SAFE SAFE · allocates and regulates the use of investment quota under the RMB QFII · monitors and regulates the remittance and repatriation of RMB funds jointly with PBOC
regulates onshore securities investment by HK Subsidiaries
reviews and verifies applicants' eligibility and issues RMB QFII licences
regulates onshore RMB accounts opened by HK Subsidiaries
regulates investment by HK Subsidiaries in the money markets
monitors and regulates the remittance and repatriation of RMB funds jointly with SAFE
allocates and regulates the use of investment quota under the RMB QFII
monitors and regulates the remittance and repatriation of RMB funds jointly with PBOC
A HK Subsidiary wishing to apply for a RMB QFII licence must satisfy the following requirements:
· it must have obtained a Type 9 (asset management) licence from Hong Kong Securities and Futures Commission and conducted asset management business;
· it is in a stable financial condition and has a good credit standing;
· it has an effective corporate governance and internal control system, and its relevant professionals satisfy the relevant eligibility requirements under Hong Kong law;
· no material penalty has been imposed by the relevant regulator on itself or its domestic parent company in the last three years;
· its domestic parent company must engage in the business of securities asset management as approved by CSRC; and
· it satisfies other requirements of CSRC in accordance with the principle of prudential regulation.
After reviewing a complete set of application documents submitted by a HK Subsidiary, the CSRC will determine, within 60 days, whether the applicant satisfies the above eligibility requirements and either approve or decline the application accordingly. As the first batch of RMB QFIIs, nine HK Subsidiaries of PRC fund management companies and 12 HK Subsidiaries of PRC securities companies have already obtained the RMB QFII licence.
Upon receiving the RMB QFII licence from CSRC, the HK Subsidiary must apply to SAFE for an investment quota within one year. SAFE will determine whether to grant the applied quota within 60 days, failing which the RMB QFII licence must be returned to CSRC. A HK Subsidiary must remit RMB funds into China within one year after it has obtained the quota from SAFE. Otherwise, SAFE may reduce or even cancel the approved quota.
A RMB QFII can invest in shares, bonds, warrants listed on stock exchanges (currently the Shanghai Stock Exchange and Shenzhen Stock Exchange), securities investment funds and other financial instruments approved by CSRC and/or PBOC. A RMB QFII can also subscribe for equities in an IPO, convertible bonds, a rights issue and allotment of shares.
The investment portfolio of a RMB QFII must be balanced and must comply with a prescribed allocation ratio. Currently, no more than 20% of the RMB QFII's funds may be invested in equities or equities investment funds, and that no less than 80% of the funds must be invested in fixed-income products, including various kinds of bonds and fixed-income type of securities investment funds.
The RMB QFII scheme is quite different from the QFII Regime in that only the RMB QFII may invest in the inter-bank bond market in accordance with the rules of PBOC. The inter-bank bond market is regulated by PBOC and the National Association of Financial Market Institutional Investors. It differs from the exchange-traded bond market and is based on a quotation inquiry mechanism operated by National Interbank Funding Center (NIFC) with certain financial institutions acting as market makers. Products in the inter-bank bond market include bonds spot trading, bonds forward, bonds repurchase, and arguably bonds lending. Under the PBOC Circular, an RMB QFII can invest in the inter-bank bond market through a settlement agent capable of processing international settlement upon obtaining approval from PBOC. Such investment will be regulated, by reference, by the provisions of the PBOC Circular on Relevant Issues on Pilot Project for Investment in the Inter-bank Bond Market Using RMB by Three Types of Institutions (Inter-bank Bond Market Circular). Under the Interbank Bond Market Circular and the implementing guidelines issued by NIFC, the relevant PBOC approval will specify what investment products are permitted, while NIFC will activate the corresponding trading authority for the approved trader.
For purposes of domestic securities investment, a HK Subsidiary is required to open three kinds of RMB special deposit accounts, one for each of the purposes of inter-bank bond market investment, on-exchange bond investment and listed shares investment.
Unlike the QFII Regime which has clarified the ownership issue for "open-ended China funds" that are "QFII-fund" securities accounts, the Pilot Measures do not actually address the same issue for securities invested through a RMB QFII. In fact, the PBOC Circular only provides that each open-ended fund launched by a HK Subsidiary must open separate RMB special deposit accounts.
Control on remittance and repatriation of funds
RMB can be raised by a RMB QFII through RMB funds launched in Hong Kong or other products permitted by Hong Kong regulators. Each HK Subsidiary can remit RMB funds into Mainland China within its investment quota approved by SAFE. Reportedly, the total aggregate investment quota available at the current stage is RMB20 billion, within which SAFE may make allocations to applicants. On 30 December 2011, SAFE announced on its website that the first batch of RMB QFII quota amounting to RMB10.7 billion had been allocated to 10 Hong Kong Subsidiaries, and reportedly, so far the remaining quota has been fully allocated to the other 11 Hong Kong Subsidiaries.
A HK Subsidiary must remit RMB funds through its onshore custodian, which, in accordance with the PBOC Circular, must have obtained the qualification of both a custodian bank for qualified foreign institutional investors and a settlement agent at the inter-bank bond market. The custodian is also obliged under the Pilot Measures to supervise onshore investment made by the HK Subsidiary by attending to certain reporting requirements to relevant PRC regulators. The HK Subsidiary also owes certain reporting obligations, through its custodian, to the RMB Cross-border Payment and Receipt Information Management System of PBOC.
Although RMB is required to be remitted into Mainland China for investment, a HK Subsidiary can repatriate the investment principal and profits in either RMB or foreign currencies. According to the SAFE Circular, for open-ended funds launched by a Hong Kong Subsidiary, the HK Subsidiary can process the remittance into China and the repatriation back to Hong Kong based on the net subscription/redemption amount on a daily basis. As for other types of RMB QFII funds, the remittance and repatriation can only be conducted on a monthly basis. This mechanism is of considerable importance for RMB QFII funds launched by the Hong Kong Subsidiaries to raise RMB for investment via the RMB QFII scheme.
The RMB QFII scheme diversifies the investment channels for RMB in Hong Kong and should improve the utilisation of offshore RMB funds. It is also a key step to further open up Mainland China's capital market in the long run and enhance closer relationship between Hong Kong and Mainland China. With the promulgation of the PBOC Circular and SAFE Circular subsequent to the issue of the Pilot Measure and the CSRC Implementing Rules, the regulatory framework for the RMB QFII scheme is basically complete. As of now, Hong Kong Securities and Futures Commission has already approved eighteen RMB QFII funds most of which have already been launched.
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