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1. Basic Information about the Qualified Foreign Institutional Investors System
The Qualified Foreign Institutional Investors (QFII) system refers to an opening-up mode of the capital market whereby approved qualified foreign institutional investors are permitted to remit inwards foreign exchange funds and exchange them into local currencies, to invest in the local securities market with the exchanged funds via special accounts, and, with approval, to process outward remittances of their principal, capital gains, dividends, and so forth with the purchased foreign exchange. In November 2002, when the QFII system was formally implemented in China the China Securities Regulatory Commission and the Peoples Bank of China jointly promulgated the Provisional Regulations on the Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII).
Since the first QFII was introduced in China in June 2003, QFII experiments have been steadily carried out. Implementation of the QFII system has played a positive role in introducing advanced investment theories, cultivating institutional investors, promoting market innovations, and so forth, and has facilitated the development of Chinas capital market.
2. Basic Information about the Qualified Domestic Institutional Investors System
The Qualified Domestic Institutional Investors (QDII) system refers to an opening-up mode whereby qualified domestic institutional investors are permitted, within a certain quota approved by the regulatory authorities, to invest in overseas securities market via special accounts. In April 2006, the QDII system was approved and formally initiated. Currently, the QDII system includes three kinds of institutional businesses, i.e., overseas securities investment businesses such as overseas wealth management services on behalf of clients provided by commercial banks, overseas uses of insurance funds, and fund management companies.
Implementation of the QDII system broadens the channels for overseas investment by domestic institutions and individuals and, in collaboration with the QFII system, jointly promotes regulation over the two-way flow of funds, thus facilitating an equilibrium in the balance of payments and improving the current setup in whereby official reserves dominate Chinas overseas financial assets. Up to the end of 2008, among Chinas overseas financial assets of USD 2 trillion, the share of foreign exchange reserves was about 75 percent, but during the corresponding period in Japan the ratio was only 20 percent. With implementation of the QDII system, the share of non-official overseas financial assets can be gradually increased.
3. What is the situation for investment quota approvals of QFIIs and QDIIs and for the inward/outward remittances of funds?
By the end of August 2009, the SAFE had approved institutional investment quotas for 76 QFII, amounting to USD 15.32 billion, and they had remitted inwards a total of USD 13.846 billion.
By the end of August 2009, the SAFE had approved overseas securities investment quotas for 56 QDII institutions, amounting to USD 55.951 billion, among which USD 33.565 billion was for 12 fund management companies and securities companies (hereinafter referred to as securities trading institutions), and the net outward remittance of QDII funds amounted to USD 28.711 billion, among which USD 14.495 billion was securities QDII funds.
4. How should the principles in the examination of the QFII investment quota be understood?
The QFII system mainly aims at encouraging foreign medium- and long-term institutional investors to make securities investments in China, so during the quota examination, we give priority to prioritize applications from institutional investors such as pension funds, insurance funds, mutual funds, charity funds, donation funds, and government and currency administrative authorities. During the early stage of the QFII experiment, due to the relatively high requirements for approval, institutions that applied for QFII qualifications were usually large-sized institutions with a good reputation, so to some extent we favored their investment quota in order to guarantee the stability of the QFII funds. Later, examination of the QFII quota was conducted in a basically balanced manner, mainly in light of the QFII institutions asset size, asset allocations, investment management capability, past investment performance, and so forth.
5. What is the main content of the Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII)? What are the improvements when compared with the 2002 Provisional Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII)?
The Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII) (hereinafter referred to as the Regulations) encompass 6 chapters and 27 articles, including mainly general provisions, investment quota administration, account administration, exchange management, statistics and administration, and supplementary provisions. Compared with the 2002 Provisional Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII), the Regulations exhibit the following improvements: first, the ceiling for the investment quota of a single QFII institution is raised from USD 800 million to USD 1 billion; second, QFII institutions are permitted to open fund accounts of different natures and types; third, the principal lock-up period for pension funds, donation funds, open-ended Chinese funds, and so forth for medium- and long-term investments is reduced to 3 months; fourth, the management principles for open-ended Chinese funds are specified, and many phases, such as the account opening, management of the lock-up period, exchange of funds, purchases and redemptions, are more convenient for the applicants.
6. What is the main content of the Circular of the State Administration of Foreign Exchange (SAFE) on Relevant Issues Concerning Foreign Exchange Administration of Overseas Securities Investments by Fund Management Companies and Securities Companies?
The Circular of the State Administration of Foreign Exchange (SAFE) on Relevant Issues Concerning Foreign Exchange Administration of Overseas Securities Investments by Fund Management Companies and Securities Companies (hereinafter referred to as the Circular) encompasses 12 articles, including investment quota administration, foreign exchange account management, funds exchange management, statistics and monitoring, and so forth. On the one hand, the Circular simplifies the procedures and required materials necessary for securities trading institutions to apply for an overseas securities investment quota, thus shortening the procedure flow and improving efficiency. On the other hand, it specifies the principles for the balanced management of the overseas investment quota of securities trading institutions. Meanwhile, it also stipulates that securities trading institutions that are awarded an investment quota can invest in all kinds of overseas securities investment products approved by the regulatory authorities. Moreover, in order to avoid a situation whereby the securities trading institutions accept a quota but do not use it, the Circular stipulates that the SAFE has the right to reduce any investment quota that is not used effectively within 2 years.
7. How do the Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII) apply to institutions that have been awarded a quota?
Those QFII institutions that have been awarded a quota can file an application with the SAFE to open separate accounts so as to satisfy the requirements for differentiating the distinct sources of funds. Those QFII institutions that have transferred or resold their quota prior to promulgation of Regulations should report the relevant situation to the SAFE and end all such activities as of the date of promulgation.
8. What requirements are proposed for follow-up administration of QIIs by the Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII) and the Circular of State Administration of Foreign Exchange (SAFE) on Relevant Issues Concerning Foreign Exchange Administration of Overseas Securities Investment by Fund Management Companies and Securities Companies?
The Regulations and the Circular further enhance statistics, monitoring, and follow-up administration, including mainly the following improvements: first, the relevant reporting system is improved and the contents of the reports are enriched; second, the responsibilities regarding reporting and filing for QIIs and their custodians are specified; third, the obligation of reporting the balance of payments by the QII and its custodian is stipulated; fourth, the relevant principles and basis for punishment are specified; fifth, the daily administrative responsibilities by the local branches of the Administrations of Foreign Exchange are noted.
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