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To further reform forex regulations on QFII/RQFII, the People’s Bank of China (“PBOC”) and the State Administration of Foreign Exchange (“SAFE”) have planned to amend the Provisions on the Administration of Funds of Qualified Foreign Institutional Investors for Domestic Securities and Futures Investment (“Current Rules”) and formulated a consultation paper (“Consultation Paper”) for public comment. The deadline for feedback comments is December 10, 2023.

 

1.To Further Simplify Registration Procedures

 

As before, QFII/RQFII after obtaining license from the China Securities Regulatory Commission and before commencement of investment shall register with SAFE through the main PRC custodian engaged by it. However, the approval by SAFE will be canceled.

With the approval by SAFE canceled, the main PRC custodian can complete the registration directly.

 

As before, the main PRC custodian is required to fulfil its duties conscientiously, and strictly review the authenticity of materials provide by QFII/RQFII.

 

Tips by Merits & Tree: Where registration with SAFE has not been done in accordance with applicable rules, (1) pursuant to Current Rules, QFII/RQFII will be punished by SAFE; while (2) according to the Consultation Paper, both QFII/RQFII and the main PRC custodian may be punished (as the case may be).

 

2.To Further Improve Account Administration

 

It is no longer required to distinguish between special RMB deposit accounts used for securities transactions and derivatives transactions, and the income and expenditure scope of the two will be merged to reduce the number of accounts required for QFII/RQFII to carry out different types of investments.

 

It will simplify the account opening procedures and help reduce costs so incurred.

 

3.To Further Simplify Inward and Outward Remittance

 

It will no longer require that the principal and investment income in RMB accounts corresponding to foreign currencies must be converted into foreign currencies and then remitted, and RMB funds can be remitted directly.

 

According to Current Rules and relevant Q&A, QFII/RQFII may choose to provide a letter to the PRC custodian handling the repatriation on each occasion or to provide a letter covering a period to such custodian, and each letter shall be issued to one custodian only. The Consultation Paper is to further simplify it with a one-time undertaking letter to comply with tax-related laws and regulations submitted when registering with SAFE for the first time.

 

Tips by Merits & Tree: Although with some breakthroughs, it shall be noted that: (1) cross-currency arbitrage is still prohibited between RMB and foreign currencies, which may imply that only conversion from one foreign currency to another based on the actual need is allowed; and (2) in principle, RMB funds remitted to China cannot be repatriated in foreign curries.   Undertaking letter on tax compliance will be replaced by a more inclusive undertaking letter, to undertake compliance on anti-money laundering, anti-terrorist financing, and tax payment in accordance with applicable laws and other requirements.

 

4.To Further Facilitate Forex Risk Management

 

QFII/RQFII carrying out spot forex settlement and forex derivatives transactions can choose to directly do it with the custodian or other domestic financial institutions as a client, or apply to become a member of CFETS and trade via prime brokers. Besides, foreign banks as QFII/RQFII can also choose to apply to become a member of CFETS and trade directly.

 

After the reform, it will be consistent with the policies under CIBM Direct schemes, which have been implemented by PBOC and SAFE in the passing years.

 

5.Update of Some Provisions Simultaneously

 

For example, the Consultation Paper allows the two-way transfer of funds in the QFII/RQFII special accounts and the special accounts under CIBM Direct under the same name of any foreign institutional investor, provided that after the transfer, the transactions, the use of funds and the forex settlement shall comply with the regulatory requirements of the later scheme. In fact, such principle has already been set up by PBOC and SAFE in their regulatory rules on bonds investment by foreign investors, and now it will be added into the regulatory rules of QFII/RQFII for the purpose of consistency.

 

6.Our Observation and Outlook

 

The Consultation Paper further deepens the QFII/RQFII forex administration reform. On the one hand, it will further simplify the procedures related to the inward and outward remittance of funds after the 2020 reform. On the other hand, it will also unify the funds and accounts administrative rules for foreign investors investing in the financial market of China through different channels (QFII/RQFII and CIBM Direct, etc.).

 

The Consultation Paper will help further facilitate QFII/RQFII business operations, and will also help foreign investors who invest in China’s securities and futures markets through different channels to better understand and grasp China’s regulatory policies. We believe that the implementation of the new regulations will help attract more foreign investors to invest in China through QFII/RQFII.