China asset management: Recent developments in QFII and RQFII regimes

The Qualified Foreign Institutional Investor (QFII) regime and the Renminbi QFII (RQFII) regime have significantly changed since the beginning of this year. On 3 February 2016, the State Administration of Foreign Exchange (SAFE) issued the Foreign Exchange Administrative Rules on Domestic Securities Investment by QFIIs (the New QFII Rules). On September 5, 2016, the People’s Bank of China (PBOC) and SAFE jointly issued the Circular Concerning the Relevant Matters on Domestic Securities Investment by RQFIIs (the New RQFII Circular). In this updater, the New QFII Rules and the New RQFII Circular are collectively referred to as the New Regime.

The New Regime, which replaces relevant existing regulations, has made changes in matters such as quota administration, balance and account management, and fund remittance of QFIIs and RQFIIs. These changes to some extent pass on a message that the Chinese government is further opening its capital accounts for capital inflow. The market even anticipates that there could be a merger of the QFII and the RQFII regimes in the near future.

We set out below a summary of the major changes that have been made to the QFII and the RQFII regimes:

New administration on investment quota

Under the New Regime, a new concept of “base quota” is introduced which is to replace the original investment quota limit. The base quota refers to an investment quota calculated according to a certain percentage of its asset scale or the scale of its asset under management. This base quota applies to all QFIIs/RQFIIs except for those who are foreign sovereign wealth funds, central banks and monetary authorities whose investment quota is unlimited based on their actual needs.

The New Regime also provides a range of such base quota applicable to all QFIIs, which is in the range of USD 20 million and USD 5 billion, but does not set a range for all RQFIIs.

QFIIs and RQFIIs are able to obtain investment quota according to the calculation of their base quota by making a filing with SAFE through their custodian banks. Any investment quota amount exceeding the permitted base quota remains subject to SAFE’s approval.

The New Regime also implements a balance management on the investment quota granted to each QFII/RQFII. The New Regime no longer differentiates between the types of investment quota (e.g. quota for open-ended funds or segregated accounts etc.), but manages the investment quota on balance basis, i.e. the aggregated funds remitted into China by each QFII/RQFII must be within its investment quota.

Relaxation on principal inward remittance and relevant lock-up period

In the past, QFIIs/RQFIIs were generally required to remit their principal into China within 6 months of their investment quota being approved. This restriction has been removed under the New Regime.

Also, the New Regime generally shortens the principal lock-up period for QFIIs/RQFIIs to 3 months (i) upon the aggregated principal remitted into China reaching RMB 100 million (for RQFIIs), or (ii) upon the aggregated principal remitted into China reaching USD 20 million (for QFIIs). Note that this restriction does not apply to an RQFII (for its open-ended fund clients) which has never been subject to a principal lock-up period.

Relaxation on outward remittance of funds

Outward remittance of funds by RQFIIs for their open-ended fund clients remain on a daily basis under the New Regime. The New Regime now also permits outward remittance of funds by RQFIIs (for all other clients) on a daily basis after the expiry of the relevant lock-up period (as opposed to on a monthly basis as in the past). The investment quota of an RQFII must not be decreased even if the principal of such RQFII is remitted outwards.

In terms of QFIIs, outward remittance of principal is no longer subject to prior SAFE approval. Also, a QFII now can remit funds outward for its open-ended fund clients on a daily basis (as opposed to on a weekly basis as in the past). However, outward remittance of funds by QFIIs (for both open-ended clients and other clients) remains subject to threshold limitations. For example, the net amount of aggregated outward fund (including profits (and principals if applicable)) remittance by a QFII monthly cannot exceed 20% of total assets placed within China as of the end of the preceding year.

Account Management

Under the New Regime, account management on QFIIs and RQFIIs is also unified. The New Regime liberalises the quantity limitation on opening bank accounts on each QFII. Each QFII now can open multiple foreign exchange bank accounts and the corresponding Renminbi bank accounts for each of its clients (including open-ended fund clients and other clients). Also, the previous minimum amount requirement (i.e. equivalent to USD 20 million) for each Renminbi account of a QFII has been removed.

Hence, both QFIIs and RQFIIs can open unlimited bank accounts for their clients. It is also suggested that the relevant securities accounts are opened in correspondence to each bank account opened for any single client of QFIIs/RQFIIs. Such segregation of client funds from funds of QFIIs/RQFIIs and segregation of funds between different clients of QFIIs/RQFIIs on book may effectively protect and isolate the funds of QFIIs/RQFIIs and the funds of each client of QFIIs/RQFIIs.

Simplified Regulatory Registration Requirements

The New Regime also unifies and simplifies the registration of QFIIs/RQFIIs. Each QFII or RQFII is only required to register with SAFE (through its custodian bank) within 10 days upon the initial investment quota being granted. Any change of registration with SAFE is also limited to a few matters such as change of names of QFIIs/RQFIIs, change of custodian banks, and change of product information (if applicable) etc.

However, the New Regime requires the relevant custodian banks to report any material penalties imposed on QFIIs/RQFIIs (or their major shareholders as de facto controllers) which may have significant impact on investment operation of the relevant QFIIs/RQFIIs or even cause the relevant licence of QFIIs/RQFIIs to be suspended or revoked.

In short, by launching the New Regime, policies on investment quota, fund remittance and account management on QFIIs and RQFIIs become similar or in some cases the same. It is anticipated that this may help Chinese capital markets to attract more overseas long-term investors so as to better structure Chinese A-share market.

On November 10, 2016, the governments of China and the UK concluded the 8th UK-China Economic and Financial Dialogue (Dialogue) in London. We summarise below the agreement reached in the Dialogue in respect of the asset management sector:

• pursue a closer China-UK regulatory and commercial collaboration and published the Strategic Plan for Financial Service (the Plan), including planning relating to the asset management sector, banking sector, insurance sector, and pension sector, etc.;
• establish a UK-China Financial Services Summit to facilitate the implementation of the Plan, including supporting the China Free Trade Zones and providing recommendations on pilot projects to open up financial channels;
• deepen the collaboration on market access in both capital market by way of:
  • researching and preparing viable rules for the potential Shanghai-London Stock Connect;
  • promoting an increased number of mainland Chinese fund managers to trade FTSE Russell-benchmarked fund products;
  • welcoming UK issuers’ participation in China interbank bond market;
  • encouraging UK institutional investors to trade in Chinese interbank markets and welcoming UK institutional investors to invest into exchange bond markets through QFII and RQFII regimes; and
  • welcoming the China Foreign Exchange Trading System to open a branch office in London so as to promote cross border investments etc.
• strengthen business cooperation on asset management and over the counter derivative business between China/UK financial industries and financial institutions by way of:
  • establishing a formal dialogue mechanism between the Asset Management Association of China (AMAC) and the UK Department for International Trade;
  • promoting further communication between the China Securities Regulatory Commission and the UK Financial Conduct Authority on the fund management sector, based on the common understanding on mutual fund recognition agreed in the 7th UK-China Economic and Financial Dialogue;
  • Chinese authority promising to relax further the foreign financial institutions’ investment shareholding cap in securities companies and fund management companies;
  • Chinese authority promising to support the foreign wholly-owned or joint venture private fund management entities to register with AMAC and engage in private securities fund management business, especially support Aberdeen’s Chinese subsidiary (see the article below) to register with AMAC and launch private fund products afterwards; and
  • both authorities promising to explore increased participation of qualified foreign firms in domestic and cross-border custodian business.

On 14 September 2015, Aberdeen Asset Management PLC formally established Aberdeen Investment Management (Shanghai) Company Limited (Aberdeen Shanghai) in the China (Shanghai) Pilot Free Trade Zone (SFTZ).  Aberdeen Shanghai is the first wholly foreign-owned enterprise (WFOE) which specifically has “investment management” as part of its company name and its business scope.

By way of background, “investment management” as a category of the business scope, or as part of a company name, though not expressly restricted, was in the past only available to domestic companies.  WFOEs were only able to engage in “investment advisory” or “investment management advisory” business which were also subject to various restrictions.  For example, due to express restrictions, foreign invested enterprises with a foreign shareholding reaching or above 25 per cent were not permitted to engage in securities investment advisory business.

The establishment of Aberdeen Shanghai echoes the 7th UK-China Economic and Financial Dialogue, in which China agreed to allow qualified locally-incorporated WFOE or joint venture private fund management institutions to engage in private securities management business (including the secondary market trading of securities subject to relevant domestic regulations).  To formally become a private fund manager, Aberdeen Shanghai still needs to be registered with the AMAC as a private asset manager.

Notwithstanding the above, a WFOE remains unable to become a mutual fund manager, which is a regulated entity subject to approval from the China Securities Regulatory Commission (CSRC), and is only available to foreign invested enterprises with a foreign shareholding not exceeding 49 per cent.