China to Cancel Foreign Investment Quotas and Simplify Procedures for Remittance and Repatriation

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The People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) on May 7, 2020, jointly issued the Administrative Regulations on Funds Used by Foreign Institutional Investors for Domestic Securities and Futures Investment (Announcement [2020] No. 2) (Regulations on FII Investment), which were effective on June 6, 2020. On the same day, PBOC and SAFE issued a policy Q&A for the Regulations on FII Investment, which provided more detailed operational guidelines. The Regulations on FII Investment classified and simplified administrative requirements on remittance and repatriation of funds by foreign institutional investors (FIIs), and considered to be further liberalization of China’s financial markets. There are a number of key developments and highlights, including as follows:

Inward Remittance

No More Investment Quotas: The Qualified Foreign Institutional Investors (QFIIs) and Renminbi Qualified Foreign Institutional Investors (RQFIIs) Schemes were respectively launched in 2002 and 2011 as stipulated in the Interim Provisions on Foreign Exchange Administration of Domestic Securities Investment by Qualified Foreign Institutional Investors. After undergoing several rounds of reforms and developments, the investment quotas limitations on two inbound investment schemes—QFIIs and RQFIIs schemes—were eventually removed by SAFE at a press conference on September 10, 2019. The Regulations on FII Investment further confirms this policy and the FIIs will no longer be subject to the investment quotas.

Registration Only: Previously, a qualified FII could, through its custodians (i.e., qualified commercial banks in China), acquire a base investment quota by submitting record-filing with SAFE and any portion in excess of the base investment quota would be subject to the approval by SAFE. The Regulations on FII Investment do not require SAFE approval, but only require an FII to authorize its main custodian to start the registration process at SAFE to wire money into China. The following documents are required to be submitted for registration: (1) Registration Form for Foreign Institutional Investors; and (2) a copy of the Securities and Futures Business License that the FII obtained from the China Securities Regulatory Commission. Then, SAFE will issue and provide the business registration certificate to the main custodian.

Main Custodian Regime: Prior to the release of the Regulations on FII Investment, the QFIIs were allowed to entrust only one custodian, while the RQFIIs were allowed to entrust no more than three custodians. Please see below new rules regarding entrustment of custodians in the Regulations on FII Investment:

  • While an FII entrusts two or more custodians, one custodian should be assigned as the main custodian. (If only one custodian is entrusted, it will automatically become the main custodian.)
  • If the main custodian changes, an FII should apply for registration for such change with SAFE within 10 working days from the date of change.

The cancellation of the restriction on the number of custodians is a significant improvement which brings great convenience to the large-scale FIIs to design their Chinese business model and coordinate with their global business practices.

Account Arrangement

Discretion on Currency and Timing: In the past, the QFIIs and RQFIIs schemes were regulated under two different investment rules distinguished by the accepted currency. There will be no such separation between QFIIs and RQFIIs after the Regulations on FII Investment are in place. An FII may elect to deposit foreign currency or RMB as needed (e.g., based on the timetable in its own investment plan) and open the corresponding bank accounts as required. More specifically, the Regulations on FII Investment state as follows:

  • If FIIs only need to invest with foreign currency, they should open a foreign currency special account and an RMB special deposit account aligned with the foreign currency special account.
  • If FIIs only need to invest with RMB, only an RMB special deposit account is required.
  • If FIIs need to invest with both RMB and foreign currencies, they should open an RMB special deposit account for the RMB investment and a foreign currency special account with a corresponding RMB special deposit account for the foreign currency investment. The names of two RMB special deposit accounts should be strictly separated from each other and no transfer between them is allowed.

Therefore, for those who were qualified as QFIIs, if the RMB investment is needed, they should additionally open an RMB special deposit account. For those who were qualified as RQFIIs, if the foreign currency investment is needed, they should additionally open a foreign currency special account and an RMB special deposit account aligned with the foreign currency special account. 

Outward Remittance

Simplification of Repatriation of Capitals and Returns: Prior to the Regulations on FII Investment, there were different requirements for the repatriation of capital and returns among an FII’s self-owned funds, its clients’ funds, and open-ended funds. Currently, a unified approach is adopted under the Regulations on FII Investment to eliminate the limits on the lockup period and transfer frequency for the repatriation. The Regulations on FII Investment also no longer require the audit report and tax payment certificate which are replaced with a letter of undertaking for the tax payment (see Table 1 below for more details). It markedly simplifies the repatriation procedure and ensures the timely transfer of the capitals and returns for the FIIs. 

Comparison of Documents Required for Repatriation

Old Requirements

New Requirements

Application or Instruction from the FII

Application or Instruction from the FII

Special Audit Report on Investment Returns Issued by a Chinese Certified Public Accountant

Letter of Undertaking for the Tax Payment Issued by the FII

Tax Payment Certificate or Tax-Related Archival Filing Certificate (if available)

Flexibility for Repatriation After Liquidation (Including Product Liquidation): Compared with old rules of the cross-border funds transfer, the documents required to remit funds outward remains unchanged. However, the exit schedule is more flexible for an FII to liquidate its assets and close its bank accounts once its business license is revoked. The 30-day rule for sale of assets and close of accounts is no longer a hard-and-fast rule. Practically, there is more room for negotiation.

Takeaways

The Regulations on FII Investment have achieved significant progress in liberalizing the currency control of China, aiming to attract more foreign institutional investors’ participation in China’s financial market with smoother inbound channels and more efficient transaction procedures. It is a strong signal of the Chinese government’s intention, determination, and confidence in expanding its market-opening and reform policies.     

The authors recognize the contributions of Legal Practice Assistant Sherry Wei to this update.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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