30 January, 2020
On December 13, 2019 the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly issued the Administrative Provisions on Domestic Securities Investment Capital of Foreign Institutional Investors (Consultation Paper) (“Consultation Paper”). The Consultation Paper has combined and amended the Administrative Provisions on Foreign Exchange Control for Securities Investments in China by Qualified Foreign Institutional Investors (QFII) (SAFE Announcement [2018] No. 1) and the Circular of the PBOC and the SAFE on Issues Concerning Administration of Securities Investments in China by RMB Qualified Foreign Institutional Investors (RQFII) (Yin Fa [2018] No. 157) (Collectively, “Current Provisions”), with the aim to implement the relevant requirements for capital management and risk prevention in QFII/RQFII’s domestic securities investments upon the removal of investment quota restrictions on QFII/RQFIIs in this September. Once officially promulgated, the Consultation Paper will replace both the Current Provisions and the SAFE Circular on Adjusting the Method for Submitting Qualified Institutional Investor Data (SAFE Circular [2015] No. 45).
Compared with the Current Provisions, the Consultation Paper proposes the following changes:
I. Unified Management of QFII/RQFII Capital
The foreign institutional investors under the Consultation Paper include both QFIIs and RQFIIs (collectively, "Qualified Investors"). The major difference between the current rules on the capital management of QFIIs and those on the RQFIIs is the calculation of QFII/RQFII investment quotas, while after the quota restrictions were lifted, such differences barely exist and thus the rules regarding the capital management of QFIIs/RQFIIs can be unified.
Pursuant to the Consultation Paper, a QFII/RQFII shall open an account corresponding to the currency in which its inward remittance is paid, specifically: (i) for inward remittance in foreign currency only, a foreign exchange ("forex") account as well as a dedicated RMB deposit account shall be opened; (ii) for inward remittance in RMB, a dedicated RMB deposit account shall be opened; (iii) for inward remittance in both RMB and forex, the accounts mentioned in (i) and (ii) shall be separately opened. Appendix II to the Consultation Paper provides guidelines for the operation of domestic accounts, clarifying issues such as account opening, fund transfer, and fund use restrictions for each type of account.
II. Registration Management System
As the QFII/RQFII investment quota restrictions have been lifted, the SAFE will implement a registration-based management system for QFII/RQFIIs. Pursuant to Articles 5 and 6 of the Consultation Paper, after a QFII/RQFII has obtained the Securities and Futures Business Permit issued by the CSRC, it shall entrust its main custodian to register with SAFE. Only a few materials are required for the registration, namely, (i) Registration Form for Qualified Investors; and (ii) a copy of the Securities and Futures Business Permit. Notably, the Qualified Investor Registration Form has also been significantly simplified. The Consultation Paper also specifies that a QFII/RQFII, which has already registered for its relevant businesses prior to the official release of the Consultation Paper, is not required to complete the registration again after the Consultation Paper is officially issued.
III. Simplification of Inward Remittance and Repatriation Process
The Current Provisions require a QFII, in accordance with its investment plan, to instruct its custodian to settle and transfer the forex funds used for investments directly into the relevant RMB accounts within 30 working days before the actual investments take place. The Consultation Paper has removed this required 30-working-day period; instead, a QFII is only required to promptly instruct the custodian to transfer the funds, which to some extent provides operational flexibility.
Since June 2018, the cumulative net repatriated funds of a QFII has no longer been capped at 20% of its total domestic assets at last year’s end and now the Consultation Paper further simplifies the procedures for repatriation of funds. It removes the other requirement that a QFII/RQFII shall provide a special audit report on investment proceeds, proof of tax payment or tax filing certificate issued by a Chinese certified public accountant when repatriating investment proceeds, but only requires a QFII/RQFII to provide an Undertaking Letter of Tax Clearance. We believe that the simplification of application materials required for repatriation can substantially speed up repatriating investment proceeds by a QFII/RQFII, thereby alleviating the unease of foreign investors on repatriation.
It is worth noting that the Consultation Paper emphasizes that the inward remittance and repatriation made by a QFII/ RQFII in regard to its domestic securities investments shall be in the same currency, and no cross-currency arbitrage shall be allowed.
IV. Trading of Derivatives
Consistent with the Current Provisions, the Consultation Paper requires that a QFII/RQFII shall conduct domestic trading of derivatives only for hedging purposes, and derivative exposures and investment risk exposures of the underlying domestic securities investments shall have a reasonable correlation. Moreover, it retains the requirements of the principle that forex derivatives shall only be traded for genuine needs, while no longer requiring that forex derivative position shall be adjusted on a monthly basis in accordance with the scale of RMB assets corresponding to the domestic securities investments as calculated by the custodian.
V. Custodian’s Obligation to Review
The Consultation Paper strengthens the custodian's obligation to review the application materials for capital registration submitted by QFII/RQFIIs and their fund sourcing. For example, the Consultation Paper stresses the main custodian's obligation to verify the authenticity of the application materials for capital registration submitted by a QFII/RQFII; it also requires that in the course of handling the business of fund repatriation for a QFII/RQFII a domestic custodian shall verify the authenticity and compliance of the receipt and payment of relevant funds by such QFII/RQFII, and duly perform the obligations in regard to anti-money laundering and anti-terrorist financing.
We will continue to monitor the situation and keep our clients apprised of any important developments.
For further information, please contact:
Natasha (Qing) Xie, Partner, Jun He
xieq@junhe.com
