Removal of QFII and RQFII Quotas

June 09, 2020

Further to the announcement by the State Administration of Foreign Exchange ("SAFE") in September 2019 of its plans to remove the investment quota limitations on two inbound investment schemes – the Qualified Foreign Institutional Investor ("QFII") program and the Renminbi Qualified Foreign Institutional Investor ("RQFII") program,1 on May 7, 2020, the People's Bank of China ("PBOC") and SAFE jointly released the Regulations on Funds of Securities and Futures Investment by Foreign Institutional Investors (the "New Regulations").2

The New Regulations will come into effect on June 6, 2020 and will supersede SAFE's previous guidance on domestic securities investments by QFIIs (the "Old Regulations")3 and PBOC's notice to RQFIIs (the "Old Notice").4 In addition to the removal of the investment quotas of the two programs, the New Regulations also seek to standardize the administrative requirements on inward remittances and significantly simplify outward repatriation of investment income. The aim of the New Regulations is to further open up Mainland China's financial markets and to better facilitate foreign investors' participation in the Chinese financial markets.
What are the QFII and RQFII programs?

The QFII and RQFII programs were established in 2002 and 2011, respectively, to allow foreign investors to access Mainland Chinese securities using either Renminbi ("RMB") or a foreign currency. The QFII program has allowed QFIIs to invest in companies that are publicly listed on the onshore stock and bond markets in Mainland China that are traded in RMB. The RQFII program is a modified version of the QFII program and has allowed RQFIIs to invest in companies that are publicly listed on the onshore stock and bond markets in Mainland China via offshore RMB accounts. Since the establishment of the two programs, over 400 institutional investors from 31 countries have used these channels to invest in Mainland China's financial markets. However, as a governmental capital control mechanism, QFIIs and RQFIIs had to individually apply to SAFE for an investment quota, which represented the amount of money they were permitted to invest in the Chinese financial markets. In early 2019, prior to the announcement of the removal of the investment quotas, the total investment quota for QFIIs was raised from US$150 billion to US$300 billion, whilst the total investment quota for RQFIIs was set at RMB1,940 billion. Nonetheless, the QFII and RQFII programs have declined in popularity in recent years as foreign investors are now able to access the market directly using other cross-border channels such as Stock Connect and the Bond Connect. As of May 31, 2020, SAFE statistics show that approximately US$116 billion5 (representing approximately 39 percent) of the total QFII quota was granted to investors and approximately RMB723 billion6 (representing approximately 37 percent) of the total RQFII quota was granted to investors.


Key Amendments in the New Regulations

SAFE Registration and Number of Domestic Custodians
From June 6, 2020, QFIIs and RQFIIs will no longer need to apply to SAFE for an investment quota. Instead, they will be required to register their foreign institutional investor status with SAFE ("SAFE Registration"). In practice, SAFE Registration will be conducted by the reporting custodian of the QFII or RQFII and all that is required from a documentation perspective is a completed registration form7 and a copy of the QFII's or RQFII's qualification licence issued by the China Securities Regulatory Commission ("CSRC").8 Following the enactment of the New Regulations, SAFE has abolished the limit on the number of domestic custodians that the QFII or RQFII may have. Previously, whilst RQFIIs were permitted to appoint up to three domestic custodians,9 QFIIs were only permitted to appoint one domestic custodian.10 Under the New Regulations, both QFIIs and RQFIIs may appoint as many domestic custodians as they choose. If the QFII or RQFII has more than one domestic custodian, it will need to appoint one custodian as the main reporting custodian.11 If the QFII or RQFII subsequently changes its name or changes its custodians, or undergoes any other material change, after it has submitted its SAFE Registration, the reporting custodian must report this information to the SAFE within 10 working days in accordance with the New Regulations.12 This is an extension from five working days under the Old Regulations13 and the Old Notice.14

Inward Remittances
Once the reporting custodian has completed SAFE Registration, the QFII or RQFII may then open designated domestic depositary accounts with its custodian(s), such accounts being used to accept inward remittances. Separate designated accounts should be set up for RMB and foreign currencies.15 For each designated foreign currency account, the New Regulations require a corresponding RMB deposit account. The designated accounts are to be used for domestic investment and hedging purposes, whereas the RMB deposit account is used to settle day-to-day RMB expenses. If the QFII or RQFII intends to accept remittances in both RMB and a foreign currency, it needs to open at least three domestic accounts – a designated RMB account, a designated foreign currency account and an RMB deposit account.

Prior to the introduction of the New Regulations, the QFII had to notify its custodian to settle and transfer the foreign currency funds used for investments directly into its RMB account within 30 working days of making the actual investment.16 Under the New Regulations, this restriction has been removed and foreign institutional investors may choose the currencies and the timing of inward remittance at their own discretion.

Outward Repatriation
Under the Old Regulations, if the QFII or RQFII wanted to repatriate investment income offshore, back to its home jurisdiction, it needed to submit a special audit report on investment proceeds issued by a certified public accountant in Mainland China, together with tax clearance or tax filing certificates, before the custodian could process the repatriation transaction.17 However, under the New Regulations, the custodian is able process such a transaction upon receiving written instructions and a commitment letter signed by the QFII or RQFII undertaking to pay the relevant taxes.18 This is a significant simplification of the outward repatriation process and gives QFIIs and RQFIIs much greater flexibility since the special audit report could take several months to prepare.


Going Forward

Although the plans to remove the QFII and RQFII quotas were announced in 2019, the New Regulations have been introduced at a time of great volatility in the global financial markets. At the time of SAFE's initial announcement in September 2019, the intention was for such reform to facilitate capital inflows and further attract long-term quality investment from foreign institutional investors into Mainland China. In spite of such intentions, given the recent market fluctuations, it is unclear at the time of writing whether the New Regulations will be able to draw the desired larger capital inflows from foreign institutional investors in the short term. Nonetheless, for existing QFIIs and RQFIIs, the removal of the investment quotas denotes one less impediment and immediate greater access to Mainland China's financial markets.

In addition to the removal of the investment quotas, we expect to see further reform in the QFII and RQFII space. In particular, we expect the results of the 2019 CSRC consultation, which sought the public's opinion on draft regulations that would see a consolidation of the QFII and RQFII programs as well as the lowering of the eligibility thresholds for overseas applicants and providing a wider scope of permitted investment for foreign institutional investors.19 Currently, QFIIs and RQFIIs are only permitted to invest in stocks, bonds and warrants, fixed income products in the interbank bond market, securities investment funds and stock index futures. If the proposed draft regulations are enacted, QFIIs and RQFIIs would also be able to invest in certain private securities investment funds, asset-backed securities, financial futures, commodities futures and options.

We will continue to monitor the developments in the QFII and RQFII programs, but if you would like to discuss any particular aspect of these developments, please contact to any of the Dechert attorneys listed below or your regular Dechert contact.


1) Please refer to Dechert OnPoint China Announces Removal of QFII and RQFII Investment Quota Limitations.

2) 《境外机构投资者境内证券期货投资资金管理规定》.

3) The Regulations on Foreign Exchange Administration of Domestic Securities Investment by Qualified Foreign Institutional Investors (SAFE Announcement No.1 of 2018) 《合格境外机构投资者境内证券投资外汇管理规定》(国家外汇管理局公告 2018年第1号).

4) Notice by the People's Bank of China and the State Administration of Foreign Exchange of Issues concerning Domestic Securities Investment by RMB Qualified Foreign Institutional Investors (PBOC Announcement No. 157 of 2018) 《人民银行、外汇局关于人民币合格境外机构投资者境内证券投资管理有关问题的通知》(银发【2018】157号).



7) A copy of the Registration Form for Foreign Institutional Investors may be found here.

8) Article 6 of the New Regulations.

9) Article 2 of the Old Notice.

10) Article 3 of the Old Regulations.

11) Article 3 of the New Regulations.

12) Article 21 of the New Regulations.

13) Article 22 of the Old Regulations.

14) Article 21 of the Old Notice.

15) Article 7 of the New Regulations.

16) Article 14 of the Old Regulations.

17) Article 15 of the Old Regulations; Article 18 of the Notice.

18) Article 14 of the New Regulations.

19) For further information regarding the proposed consolidated regime, please refer to Dechert OnPoint, China Proposes Merger of QFII and RQFII Programs.

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