Only two months after the People’s Bank of China (PBOC) and the Ministry of Commerce issued their new rules permitting the utilisation of offshore Renminbi (RMB) funds for foreign direct investment into mainland China, the China Securities Regulatory Commission (CSRC), PBOC and the State Administration of Foreign Exchange (SAFE) announced on 16 December 2011 that Hong Kong subsidiaries of Chinese qualified fund management companies (FMCs) and securities companies can now, on a trial basis, invest RMB funds raised in Hong Kong in the mainland securities markets. The Hong Kong Securities and Futures Commission (SFC) has welcomed the CSRC announcement and will work closely with its regulatory counterparts and relevant authorities to implement this pilot scheme.
The new RQFII scheme is very similar to the Qualified Foreign Institutional Investors (QFII) schemes which permit foreign investors to indirectly invest in the Chinese securities market through qualified foreign institutions with approvals from CSRC and SAFE. The new pilot scheme will allow Hong Kong subsidiaries of Chinese FMCs and securities houses to raise RMB funds in Hong Kong, and on CSRC’s approval, invest such funds back into the Chinese securities market. SAFE will be responsible for approving the permitted quota for such Hong Kong subsidiaries’ inbound securities investments and also for supervising the inflow and outflow of funds. The PBOC as the central banking authority will supervise the custodian bank accounts in China opened by such Hong Kong subsidiaries for their portfolio investments in China.
Credential and application requirements
The new regulations require Hong Kong applicants to be SFC regulated asset managers (i.e. holding a Type 9 (Asset Management) licence) and have an “asset management” business track record of at least 3 years. The Chinese parent companies must also be permitted by CSRC to engage in asset management within China and must not have been subject to disciplinary proceedings by local or central CSRC for any material non-compliant activities for at least the last 3 years.
A qualifying Hong Kong subsidiary should first apply to CSRC for approval of its proposed investment plans. After CSRC’s approval (to be issued within 60 days of its formal acceptance of the Hong Kong subsidiary’s application), the Hong Kong applicant should apply to SAFE in order to be granted a quota for the proposed inbound securities investment. Upon being granted this quota, the Hong Kong subsidiary can then commence its investment by remitting RMB funds from Hong Kong to its accounts opened with Chinese custodian banks, and trade permitted securities in China with the assistance of Chinese securities houses. The new regulations allow one single Hong Kong RQFII to trade securities on the two Chinese securities exchanges by engaging no more than three securities houses for each securities exchange.
Other than public securities, including stocks, bonds, securities investment funds etc. traded on Chinese securities exchanges, the new regulations indicate that the Hong Kong RQFIIs can also invest their RMB funds raised in Hong Kong in: (1) the Chinese inter-bank bonds market in accordance with the relevant regulations of PBOC; and (2) the subscription of newly issued stocks (in IPOs), trading of convertible bonds and certain secondary offerings. However, CSRC requires that, subject to the permitted quota, a maximum of 20 per cent of the Hong Kong RQFII’s RMB funds be invested in stocks or stock-type funds, with at least 80 per cent of the RMB funds invested in fixed-income products such as bonds.
It is reported that investors now hold at least RMB 700 to 800 billion in Hong Kong. CSRC will initially permit RMB 200 billion in total to be invested back into the mainland under the pilot RQFII scheme. Although the initial total quota seems to be small vis-à-vis market needs for the RMB's internationalisation, the launch of this new scheme is considered by the market as a milestone that will provide new market opportunities for Chinese FMCs and securities houses in their globalisation strategies.
For any information, please contact Lynn Yang or James Zhang in Shanghai or Charlotte Robins in Hong Kong.