The State Administration of Foreign Exchange ("SAFE") recently released new regulations with respect to the qualified foreign institutional investor ("QFII") scheme. The amendments relate to the amount of investment quota allowed, the duration of the lock-up period, the opening of accounts, application procedures, and some other aspects. These measures signal the PRC government's intention to attract more foreign investment into mainland China's securities markets.

SAFE also issued the Circular on Relevant Issues Concerning Foreign Exchange Administration for Overseas Securities Investment by Fund Management Companies and Securities Companies in their capacity as qualified domestic institutional investors ("QDIIs").

Full Update

QFII Scheme

On 29 September 2009, SAFE released the Provisions on Foreign Exchange Administration of Domestic Securities Investment by Qualified Foreign Institutional Investors ("New QFII Provisions") which came into effect on that date. The New QFII Provisions replaced the Interim Provisions on Foreign Exchange Administration of Domestic Securities Investment by Qualified Foreign Institutional Investors (SAFE Notice No. 2 (2002)) and the Circular of the General Affairs Department of SAFE on Relevant Issues Concerning the Management of Foreign Exchange of Qualified Foreign Institutional Investors (No. 124 (2003)). This update outlines the key changes to the QFII scheme made by the New QFII Provisions.

Open-ended Chinese funds are defined by the New QFII Provisions as open-ended securities investment funds that are publicly raised offshore, with at least 70% of the fund's assets targeted for mainland China's securities markets.

Investment Quota Management

1. Investment quota increased

The maximum accumulated investment quota of one single QFII has been increased to USD1 billion from USD800 million.

Existing QFII's are allowed one year to apply to SAFE to increase their quota.

2. More time to utilise quota

The period allowed for a QFII to utilise the quota has been increased from three months to six months.

3. Lock-up period shortened

Preferential treatment is given to medium to long term investors such as pension funds, insurance funds, mutual funds, charity funds, endowment funds, government and monetary authorities, and open-ended Chinese funds launched by QFIIs. For such funds, the lock-up period, during which QFIIs are restricted from repatriating returns from their investment, is shortened to three months, while for other funds the lock-up period is one year.

The lock-up period will be counted from the date on which the QFII fully invests the amount. For QFIIs that do not remit funds within the specified time period, the lock-up period will be six months after the approval of the investment quota.

4. Misuse of investment quota - transfers restricted

Under the New QFII Provisions, the transfer, or resale or lease of an investment quota is no longer allowed and is subject to penalties and even cancellation of the investment quota.

The CSRC and the SAFE view the allocation of a quota to buy or sell A Shares as being unique to the QFII itself.  Any exercise of the quota at the discretion of anyone other than the QFII is regarded as an abuse of the quota. 

However, the issuance of market access products to other funds or investors in respect of A Shares held by QFIIs, is permitted, provided the investor does not have the power to give buy or sell orders to execute to the QFII in respect of those A Shares.

Account Management

1. Opening of a foreign currency account allowed

Under the old scheme, only one RMB account could be opened by a QFII and all of its funds had to be converted to RMB and deposited in such RMB account.

A QFII can now open a RMB account and a corresponding foreign currency account for proprietary funds and client funds respectively. For those that have launched open-ended Chinese funds, a RMB account and a corresponding foreign currency account are required to be opened for each open-ended Chinese fund.

Subject to the requirement that the invested amount reaches USD 20 million or the equivalent, the QFII can apply to its custodian to convert the necessary amount of funds in its foreign currency account and remit the same to its RMB account, 10 working days before making an investment.

The New QFII Provisions expressly prohibit any mingling of funds among the bank accounts opened by a QFII.

2. Events for close of bank accounts amended

The bank accounts of a QFII will be closed if (i) the invested amount is less than USD20 million or its equivalent within six months after approval of the investment quota; or (ii) the QFII disposes of investments made and repatriate the proceeds resulting in the invested amount falling below USD20 million or its equivalent.

Foreign Exchange Management

1. More flexibility given to open-ended Chinese funds

Under the New QFII Provisions, after the lock-up period, a QFII is allowed to remit into the PRC or repatriate out of the PRC, on a monthly basis, the net difference between the monthly subscription and redemption amounts for open-ended Chinese funds.

The local SAFE bureau, where the custodian is domiciled, is now the competent authority for supervising inward remittances and outward repatriations of funds for open-ended Chinese funds.

2. Approval authority for repatriation changed

Except for open-ended Chinese funds, the approval authority to whom applications should be made by those who wish to repatriate proceeds has also been changed to the local SAFE bureau, where the custodian is domiciled.


1. Application procedures simplified

QFIIs can now make an application for an investment quota and the related bank accounts at the same time, and there has been a reduction in the amount of application materials required to be submitted.

2. SAFE annual inspection cancelled

Annual inspections by SAFE have been cancelled. Instead, QFIIs are required to notify SAFE if there is any material change, and custodians are required to make reports about the operations of QFIIs to SAFE on a regular basis.

The New QFII Provisions should attract even more international financial institutions and bring more foreign investment into China.

QDII Scheme

SAFE also issued the Circular on Relevant Issues Concerning Foreign Exchange Administration for Overseas Securities Investment by Fund Management Companies and Securities Companies in their capacity as QDIIs.

The QDII scheme allows Chinese nationals to invest in offshore markets (in listed securities or mutual funds) through domestic investment products issued by QDIIs in China. QDIIs may appoint foreign investment advisors meeting certain criteria.

As at 31 August 2009, SAFE had approved quotas for 56 QDIIs since the establishment of the scheme in 2006, amounting to USD55.9 billion, of which USD33.6 billion was for 12 fund management/securities companies (who are regulated by the CSRC), with the balance approved for banks (who are regulated by the CBRC), trust and insurance companies.  Net outward remittances amounted to USD28.7 billion as at the same date.  The Circular simplifies the quota application process for fund management/securities companies and introduces a 'use it or lose it' time frame of two years. After a 18 month moratorium during the global financial crisis, SAFE has resumed issuing quotas.

CSRC permits QDIIs to invest in, inter alia, collective investment schemes authorised by any regulator, e.g. the Securities and Futures Commission in Hong Kong, with whom the CSRC has signed a supervisory co-operation memorandum. Similarly, CBRC permits QDIIs to invest in SFC authorised funds in Hong Kong as CBRC has signed a supervisory co-operation memorandum with the SFC. The SFC authorised fund itself is not subject to any additional authorisation procedures in order for it to be eligible for investment by QDIIs.

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