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19 June, 2018
On June 12, 2018, the People’s Bank of China (“PBOC”) and the State Administration for Foreign Exchange (“SAFE”) reissued the Provisions on Foreign Exchange Administration of the Domestic Securities Investments by Qualified Foreign Institutional Investors and the Circular on the Relevant Matters concerning the Administration of Domestic Securities Investments by RMB Qualified Foreign Institutional Investors (collectively, “New Regulations”), in which they announced a new round of foreign exchange administration reforms for qualified foreign institutional investors (“QFIIs”) and RMB qualified foreign institutional investors (“RQFIIs”), so as to further simplify and facilitate cross-border securities investment. The New Regulations came into effect from the date of publication.
The New Regulations include three key areas of improvement to the old regulations issued by the PBOC and SAFE in 2016.
I. Remove the 20% cap on outbound remittances for QFIIs
Where previously a QFII could not in any month cumulatively repatriate funds (including principal and return) of more than 20% of its total onshore assets held at the end of the preceding year, the New Regulations remove the cap on outbound remittances for QFIIs.
II. Remove the principal lock-up period requirement for QFIIs and RQFIIs
The 3-month investment principal lock-up period requirement for both QFIIs and RQFIIs has been removed by the New Regulations. QFIIs and RQFIIs now may repatriate their investment principal based on the status of the investment.
III. Allow QFIIs and RQFIIs to hedge the currency risk through foreign exchange hedging
With foreign investors in the China Interbank Bond Market already allowed to hedge the currency risks through foreign exchange derivative transactions, the New Regulations now explicitly permit QFIIs and RQFIIs to conduct foreign exchange hedging. Pursuant to the New Regulations, QFIIs and RQFIIs may undertake foreign exchange derivative transactions through custodians or domestic financial institutions licensed to undertake RMB-to-foreign-currency derivative transactions on behalf of clients. The New Regulations further stipulate that QFIIs and RQFIIs shall only engage foreign exchange derivative transactions on a “real need” basis, i.e. the QFIIs and RQFIIs shall limit their trading of foreign exchange derivatives to hedging the foreign exchange exposure stemming from domestic securities investment, and that the exposure of the foreign exchange derivatives shall have reasonable correlation to the foreign exchange exposure associated with the underlying domestic securities investment.
The New Regulations also provide explicit provisions on foreign exchange hedging positions (“Positions”). The Positions held by a QFII/RQFII shall not exceed the size of the RMB asset corresponding to the onshore domestic securities investment (“RMB Asset Size”) as at the end of the preceding month (excluding any RMB-denominated deposit-type assets within special deposit accounts). Such Positions may be adjusted according to the RMB Asset Size calculated by the custodians on a monthly basis, in order to ensure compliance with the principle of trading on a “real need” basis.
IV. Our Observations
We understand that the removal of restrictions on outbound remittances and on the lock–up period will to some extent facilitate investments made by QFIIs and RQFIIs. We further expect that in order to highlight the advantages of the QFII/RQFII regimes when compared with the Stock Connect, there may be additional loosening of the restrictions on further aspects of QFII/RQFII, such as the investment scope. We will continue to pay close attention to any amendments to relevant regulations and will share the latest developments with our clients.
For further information, please contact:
Natasha (Qing) Xie, Partner, Jun He
xieq@junhe.com
