Financial Services Quarterly Report - First Quarter 2013: New Rules for China’s RQFII Regime

by Dechert LLP

At the January Asian Financial Forum in Hong Kong, the Chairman of the China Securities Regulatory Commission (“CSRC”), Mr. Guo Shu Qing, stated that Mainland China could increase the level of investment quotas for both the Renminbi Qualified Foreign Institutional Investor (“RQFII”) and Qualified Foreign Institutional Investor regimes by ten times. True to form, the CSRC soon after raised its initial aggregate investment quota of RMB20 billion for RQFII schemes to a total allocated quota of RMB270 billion. More recently, on 6 March 2013, the CSRC announced the further liberalization of the RQFII regulations to support further expansion of Mainland China’s capital markets.

The RQFII program allows Hong Kong-incorporated and licensed subsidiaries of approved parent companies to utilize Renminbi (“RMB”) funds raised in Hong Kong, for the purpose of investing in the Mainland Chinese securities market. Prior to the March 6 changes, RQFII status was only available to the Hong Kong-incorporated and licensed subsidiaries of an asset management company or a securities company incorporated in Mainland China. Under the amended RQFII regulations, these restrictions have been relaxed to allow more participants to gain access to the program. Consequently, the following entities, which are licensed or authorized with the Hong Kong Securities and Futures Commission (“SFC”) to carry out asset management activities under a Type 9 license and have an existing asset management business, are now also able to apply for a RQFII license to participate:

  • financial institutions (including institutions with a foreign parent company) that are registered in Hong Kong and have Hong Kong as their principal place of business; and
  • Hong Kong subsidiaries of Mainland Chinese commercial banks and insurance companies.

The CSRC announcement also ostensibly permits a freer hand for RQFII asset managers to design their RQFII products in accordance with prevailing market conditions, although what this will mean in practice is not yet clear. The range of financial instruments in which a RQFII fund is permitted to invest has also been broadened – prior to the relaxation, RQFII funds could not invest more than 20% in equities and equity investment funds, and at least 80% of investible assets were required to be invested only in fixed-income products. Additionally, only certain types of onshore RMB financial instruments (i.e., shares, bonds and warrants listed on stock exchanges, as well as securities investment funds, initial public offerings, convertible bonds and secondary offerings) were permissible. RQFII funds may now also invest in fixed-income products on the inter-bank bond market, stock index futures and any other financial instruments permitted by the CSRC. The amended regulations are expected to allow more capital to flow in to the stock markets, with RQFII funds being given greater flexibility to invest in equities as well as debt instruments.

The expansion of the scheme to allow non-Chinese financial institutions, which are already appropriately licensed and operating in Hong Kong, to participate for the first time, will be of particular interest to the international financial community. Such foreign financial institutions were previously excluded from the scheme. The continued internationalization of the RMB will likely also be a draw to foreign firms to tap into the Chinese market by establishing a principal place of business in Hong Kong. The RQFII scheme is not expected to be used exclusively for retail funds – private funds may also be able to take advantage of the new opportunities available. The benefits to be reaped from the expansion of the RQFII regime are not just limited to Hong Kong’s shores as the CSRC is also expected to extend the regime to Taiwan, following the CSRC’s announcement in January 2013 that a quota of up to RMB100 billion will be available to Taiwanese RQFII funds. At the time this article was published, no further details on Taiwanese RQFII funds were available. It remains to be seen whether the CSRC will apply similar requirements and qualifications to the Taiwanese RQFII regime. One thing is certain, though – the popularity of the RQFII concept does not appear set to wane in Asia.

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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