China is the world’s largest exporter and one of the world’s largest economies. With access to a huge market, both in real and financial terms, foreign investors can gradually enter at a pace and scale determined by Chinese regulators. One of these opportunities is China’s Qualified Foreign Institutional Investor (QFII) program, launched in 2002 to allow foreign institutional investors direct access to share trading on Chinese exchanges using renminbi (RMB).
What is the Qualified Foreign Institutional Investor (QFII) program?
In the 21st century, China will be able to grow significantly in quantitative factors, not only in the real economy but also from a financial point of view. As the most populated country in the world, and as the second-largest economy, China is a natural focus of investor interest.
Prior to the launch of the program, foreign investors could only trade shares of Chinese companies in the form of “B shares,” which are traded on Chinese exchanges but denominated in US dollars or Hong Kong dollars, “H- shares,” which are traded on Hong Kong Stock Exchange, or “N shares,” which are listings of Chinese shares on stock exchanges in the US.
With the Qualified Foreign Institutional Investor program, China pursued two goals: more foreign investment in Chinese companies and a further strengthening of the RMB’s position as an important world currency.
With the introduction of the Qualified Foreign Institutional Investor (QFII) program in 2002, accredited institutional investors were allowed to buy and sell yuan-denominated “A” shares, i.e., shares of mainland China-based companies. However, foreign access to these shares was restricted by certain quotas. These quotas were used by the Chinese government to regulate how much foreign funds could be invested in the country’s capital market. Foreign exchange quotas are set by the State Administration of Foreign Exchange (SAFE), and they can be revised at any time to reflect economic and financial conditions in the country.
The quota for the QFII program was increased from $30 billion to $80 billion in April 2012, a decade after the program’s launch. With the quotas officially lifted in 2019, foreign institutional investors who meet the necessary requirements only need to go through the registration process to invest independently. In addition, the QFII program has been merged with the RFQII scheme to ensure a more transparent and investor-ready environment.
Over 400 institutional investors from 31 different countries and areas have invested in China’s financial market using the QFII and RQFII systems since their implementation.
Why is the QFII program a great opportunity for non-Chinese institutions?
Due to Beijing’s opening of new channels, foreign investment in Chinese assets has increased rapidly in recent years. The index providers have linked A-shares and onshore bonds to their global benchmarks, and foreign holdings have increased 4.5-fold since 2017. Thanks in part to foreign investors, the Chinese economy recovered faster than most after the Pandemic 19 pandemic devastated the globe.
In November 2020, the latest revisions to the QFII rules came into effect. This new innovation has been widely hailed as a breakthrough that will help boost demand from family offices and hedge funds for Chinese assets abroad.
Previously, the QFII/RQFII program used to only offer investors A shares, bonds, public securities funds, and equity index futures. Foreign exchange hedging has been expanded by adding the following investments to the scope of QFII/RQFII:
- Securities listed on the New Third Board (NASEQ or NEEQ)
- Chinese Futures Exchange-listed financial futures
- Exchange-traded futures and options for commodities
- Deposit receipts
- A list of bonds, currencies, and interest rate derivatives that have been approved by the PBOC for trading on the interbank market
- Repurchase agreements for bonds
- Securities backed by assets
Chinese technology sector’s stock exchange in Shanghai is called the STAR market. In addition to the above list, the QFII channel enables international investors to purchase and sell shares in the STAR market.
The Hong Kong Stock Exchange Stock Connect Program allows foreign investors access to 12 stocks on the STAR market since February. This confirms China’s continuing intention to liberalize its financial markets and attract investments from abroad.
How can non-Chinese institutions and their clients benefit from it?
The RQFII/QFII program now allows hedge fund managers, family offices, and other types of asset managers to invest, while recent enhancements directly serve a faster and more transparent process – both in obtaining licenses and in conducting business.
All required documents can be submitted online with the help of a local custodian; the entire process has been digitized. This alleviates some of the hassles associated with applying for a license since most investors usually lack the resources of larger financial institutions. Furthermore, the CSRC will process QFII applications within 10 working days, as opposed to 20. There is a reduction in the amount of documentation required for applications since the regulator no longer requires applicants to submit three years of financial records.
How to apply for a QFII license?
Qualified Foreign Institutional Investors (QFIIs) must satisfy the following requirements to obtain their license:
- Foreign institutional investors have to be deemed financially secure and reputable by the Chinese government. Investors must have a minimum level of assets under management.
- In the three years before their enrolment in the QFII program, foreign investors must not have received any disciplinary action from a financial regulator or agency.
- Other, more specific requirements may be imposed by the CSRC, such as the number of years the foreign investor has been in business.
- CSRC and the supervisory authority of the foreign investor’s home country must sign a Memorandum of Understanding. During the term of the MOU, the regulatory body of the foreign investor’s home country must assure that it will monitor the investment firm closely.
While trade tensions exist between China and the US, European investors can benefit from the liberalization of China’s investment market. You can build a future-proof asset management organization and add value to your clients by offering financial instruments under the QFII license. If you have any questions about the Qualified Foreign Investor scheme and how it can benefit you and your clients, please do not hesitate to contact us.