On May 7, 2020, the People’s Bank of China (“PBOC”) and the State Administration of Foreign Exchange (“SAFE”) jointly issued the Provisions on the Administration of Funds of Qualified Foreign Institutional Investors for Domestic Securities and Futures Investment (“New Regulation”). The New Regulation will come into effect as of June 6, 2020, replacing previous rules on foreign exchange related issues applicable to QFII and RQFII (collectively, hereinafter referred to as “QFI”).
The New Regulation generally retained the same legal framework of the consultation paper (“Consultation Paper”) issued by the PBOC and the SAFE for public comment on December 13, 2019, and it also made some necessary supplement and improvement. A corresponding policy Q&A (“Q&A”) was issued as well, featuring some procedural details.
The New Regulation has scrapped restriction on foreign exchange quota, simplified relevant administrative requirements, and achieved major breakthrough in many aspects. With such reform, QFI regime will become more attractive to foreign investors. This paper is to summarize some key points of the New Regulation.
Section I Administration Requirements on Remittance and Repatriation of Funds
- Restriction on Foreign Exchange Quota Removed
Upon approval by the State Council, the SAFE announced on September 10, 2019 that the restriction on foreign exchange quota will be removed. With the New Regulation to be implemented, such policy adjustment will formally take effect accordingly.
- Registration of QFI
The current mechanism of combining filing and approval for investment quota will be replaced by a registration mechanism upon the effectiveness of the New Regulation.
QFI shall entrust the main custodian to make a registration with the SAFE, and the registration materials have been simplified.
- Unifying QFII and RQFII Regime
Under the New Regulation, a QFI may choose currencies and the timing of inward remittance on its own discretion, but cross-currency arbitrage is prohibited between RMB and foreign currencies.
As clarified by the PBOC and the SAFE, conversion from one foreign currency to another based on the actual need is allowed, as it does not constitute cross-currency arbitrage prohibited by the New Regulation.
- Repatriation of Realized Accumulated Profits
The procedures for QFI’ repatriation of securities investment profits are significantly simplified, replacing the special audit report on investment return issued by a Chinese certified public accountant and the tax clearance or tax filing certificate with a Tax Commitment Letter signed by the QFI. Simplification of such materials will help substantially facilitate the whole repatriation process.
The Q&A has more details on the Tax Commitment Letter. QFI may choose to provide a letter to the custodian handling the repatriation on each occasion or to provide a letter covering a period of time (“Term of Validity”) to such custodian. Each letter shall be issued to one custodian only.
In comparison, in the case of repatriation due to liquidation, QFI is required to provide a special audit report on investment return issued by a Chinese certified public accountant and a tax filing certificate, unless the tax filing certificate is exempted by any to-be-issued rules in the future.
- Possible Unease of Foreign Investors Alleviated
According to the Consultation Paper, remittance and repatriation of proceeds by QFI may be subject to China’s economic and financial conditions, supply and demand on the foreign exchange market and balance of international payments.
The New Regulation removed such provision, which helps alleviate the unease of foreign investors.
Section II Accounts
- Foreign Exchange Account and RMB Special Deposit Account
A QFI shall open one or more special accounts with the PRC custodian(s) based on its actual needs of investment and funds remittance.
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Funds Remitted |
To-be-opened Accounts |
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foreign currencies only |
foreign exchange account(s) and corresponding RMB special deposit account(s) |
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RMB only |
RMB special deposit account(s) |
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both RMB and foreign currencies |
RMB special deposit account(s); foreign exchange account(s) and corresponding RMB special deposit account(s) |
Two different types of RMB special deposit accounts shall be distinguishable by names.
- RMB Basic Deposit Account and RMB Special Deposit Account
A QFI shall open RMB basic deposit account or RMB special deposit account(s) in its own names.
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Scenario |
To-be-opened Accounts |
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Only one RMB settlement account is required. |
Permitted to open a RMB special deposit account only. |
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More than one RMB settlement accounts are required to be opened for its proprietary funds, client funds and funds of open-ended fund products respectively based on the actual needs. |
Required to open both RMB basic deposit account and RMB special deposit accounts. |
RMB basic deposit account is used for daily RMB transfer settlement, while RMB special deposit accounts are used for management of funds for special purposes (e.g., securities trading and futures trading).
- Receipts and Payments of Foreign Exchange Account
Compared with the Consultation Paper, the New Regulation added an item (i.e., funds with respect to derivatives investment business) in the permitted scope of the receipts and payments of foreign exchange accounts. And, as clarified by the PBOC and the SAFE, service fees paid to third parties fall under the scope of “other payments permitted by the SAFE”.
Section III Derivatives Investment
- Hedging
QFI shall conduct trading of derivatives (foreign exchange risk hedging products and other permitted derivatives) for hedging purposes, and derivative exposures and the risk exposures of the underlying domestic securities investments shall have reasonable correlation.
The term “Stock index futures” in the Consultation Paper is changed to “other permitted derivatives” in the New Regulation to match the to-be-issued new QFII and RQFII rules by the China Securities Regulatory Commission (“CSRC”).
- Foreign Exchange Derivative Position
The New Regulation has retained the requirements that foreign exchange derivatives shall only be traded based on genuine need.
Although not provided in the Consultation Paper and the New Regulation, it has been clarified in the Q&A that foreign exchange derivative position shall be adjusted on a monthly basis in accordance with the scale of RMB assets corresponding to the domestic securities investments, which is generally consistent with currently effective regulations. QFI shall report such foreign exchange derivative position to the main custodian.
Section IV Custodian
- Limits on the Number of PRC Custodians Scrapped
Under currently effective regulations, a QFII and a RQFII can appoint one and three PRC custodian(s) respectively. The New Regulation has scrapped such limits and a QFI shall designate one custodian as the main custodian if there are two or more PRC custodians.
- Existing QFII (or RQFII)
Current custodian of QFII (or current main custodian for RQFII) will be the default main custodian, no re-registration is required.
- Existing Institutions with both QFII and RQFII Licenses
One custodian shall be designated as the main custodian within 30 business days after effectiveness of the New Regulation.
- Issues Regarding Tax Commitment Letter
According to the Q&A, when providing the letter with a Term of Validity, the QFI shall confirm with the custodian the accumulated profits to be repatriated, and the custodian, when handling the repatriation, shall review relevant application and ensure that the repatriated funds shall not exceed the amount provided in the letter.
- Monitoring Foreign Exchange Derivative Position
According to the Q&A, the main custodian shall monitor the foreign exchange derivative position of relevant QFI to make sure that such QFI has followed the principle of trading foreign exchange derivatives based on genuine need.
- Review Materials
According to the New Regulation, when handling funds remittance and repatriation, a PRC custodian shall verify the authenticity and compliance of the receipts and payments, and duly perform the obligations regarding anti-money laundering and anti-terrorist financing.
The main custodian shall verify the authenticity of the application materials for registration with the SAFE submitted by a QFI.
- Adjustment to the Consultation Paper
Relevant information reporting duties have transferred from PRC custodians to the QFI, and it is the QFI that shall entrust PRC custodians to report relevant information to the PBOC and the SAFE.
In addition, according to the New Regulation, the QFI are obliged to cooperate with PRC custodians when such custodians perform their obligations regarding anti-money laundering and anti-terrorist financing.
Section V More Policies to Come
In January 2019, the CSRC issued a consultation paper on amending its QFII and RQFII rules, and such new rules has been listed as one of the key rules that the CSRC intended to formally issue within the year 2020. With the New Regulation to be implemented, now all interested parties are expecting the aforesaid new rules to be issued by the CSRC soon.
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Please kindly note that this Memo is rendered mainly with respect to relevant laws and regulations of the PRC (for purposes of this Memo only, the PRC does not include Hong Kong, Taiwan or Macau) in effect as of the date of this Memo. This Memo is being furnished solely to you on a confidential basis for your reference purposes only.
Jingtian & Gongcheng Investment Funds & Asset Management Group has vast experience with asset management business in China, including cross-border asset management business (e.g., QFII, RQFII, QDII, RQDII, QDLP, QDIE, QFLP, RQFLP, Stock Connect, CIBM Direct, Bond Connect and MRF). In September 2019 and March 2020, Jingtian & Gongcheng received international recognition by garnering the China Investment Fund Law Firm of the Year Award from China Law & Practice and Asia Firm of the Year from The Asian Lawyer under leading international legal publishing group ALM, respectively.
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