China Expands RMB Qualified Foreign Institutional Investors Pilot Program

Mar. 13 – As part of China’s efforts to internationalize its currency, China initiated the “RMB Qualified Foreign Institutional Investors Pilot Program (RQFII Pilot Program)” at the end of 2011, which allows qualified foreign institutions to invest offshore RMB back into Mainland China’s capital market.

So far, China’s State Administration of Foreign Exchange has approved 27 financial institutions in Hong Kong to participate in the program, and the available quota of the RQFII Pilot Program has been boosted significantly from the initial RMB20 billion to RMB270 billion.

With the aim to further promote the offshore RMB business in Hong Kong and facilitate RMB internationalization, China’s Securities Regulatory Commission (CSRC) released the revised rules for the RQFII Pilot Program on March 6, 2013.

The revised rules were put forward through the issuance of two circulars, namely the “Measures for the Pilot Program of Domestic Securities Investment by RQFIIs” and the “Provisions on Implementing the Measures for the Pilot Program of Domestic Securities Investment by RQFIIs (hereinafter referred to as ‘Implementing Provisions’),” which expand the types of institutions allowed to participate in the pilot program and broaden the investment scope for RQFIIs. Detailed information can be found below.

Major Revisions

Two distinct features of the revised rules are:

Extending the scope of pilot institutions

In order to ensure the successful launch of the RQFII Pilot Program, the participating institutions were originally limited to the Hong Kong subsidiaries of domestic fund management companies and securities companies during the initial stage of the pilot program. With the revised rules in effect, the Hong Kong subsidiaries of domestic commercial banks and insurance companies, as well as the financial institutions whose registration place or principal place of business is in Hong Kong, are allowed to participate in the pilot program.

Relaxing the restrictions on investment scope

The revised rules permit institutions to determine the types of products at their sole discretion based on market conditions.

Main Contents of the Implementing Provisions

According to the Implementing Provisions, to be qualified as a RQFII, an institutional investor shall:

• Be a Hong Kong subsidiary of a domestic fund management company, securities company, commercial bank or insurance company; or a financial institution whose registration place or principal place of business is in Hong Kong.
• Have obtained the appropriate asset management business qualifications from the Hong Kong securities regulatory authorities, and have already launched its asset management business.

Within the approved investment quota, a RQFII may invest in:

• Stocks, bonds and warrants traded or transferred at stock exchanges
• Fixed-income products traded on inter-bank bond markets
• Securities investment funds
• Stock index futures
• Other financial instruments permitted by the CSRC

For a RQFII investing in the domestic securities, it shall abide by the following restrictions on the shareholding proportions:

• The shares of a listed company held by a RQFII shall not be more than 10 percent of the total shares of the listed company; and
• The total A-shares of a single listed company held by all RQFIIs shall not exceed 30 percent of the total shares of the listed company.

Each RQFII may entrust no more than three domestic securities companies with securities trading on the Shanghai Stock Exchange and also no more than three domestic securities companies with securities on the Shenzhen Stock Exchange.

The revised rules have received a warm welcome from the Hong Kong government.

“We are pleased to see the expansion of the RQFII Pilot Program, which provides new opportunities for the industry and the investors in Hong Kong. The changes will allow more market players to participate in the RQFII Pilot Program, promote the development of a broader range of RMB investment products, and strengthen Hong Kong’s status as a premier offshore RMB center,” said Alexa Lam, Deputy Chief Executive Officer of Securities and Futures Commision of Hong Kong.

According to experts, the expansion of the RQFII Pilot Programe virtually allows any foreign financial firm domiciled in Hong Kong to participate in the pilot program, and it is expected that international banks and fund houses based in Hong Kong will actively apply to participate in the pilot program.

“The expansion of the RQFII scheme will boost international investors’ interest in using RMB to invest,” said Chan Ka-keung, the Secretary for Financial Services and the Treasury of Hong kong.

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