Further Opening-up of World’s Second-Largest Capital Market — China Scraps the Investment Quota limit

On 10 September 2019, the State Administration of Foreign Exchange (“SAFE”), China’s currency regulator, officially announced the reform to scrap investment quota limits for foreign investors’ access to China’s capital markets under both schemes of Qualified Foreign Institutional Investor (“QFII”) and RMB Qualified Foreign Institutional Investors (“RQFII”). This move would “make it much more convenient for overseas investors to participate in China’s domestic financial markets, making China’s bond and stock markets more broadly accepted by international markets,” the China Securities Regulatory Commission (CSRC) said in a statement.

QFII and RQFII

China’s capital market is not a liberalized regime for foreign investors. It was not until almost 20 years ago that China started to allow foreign investments into its capital markets by introducing several channels for access. The QFII scheme launched in 2002 and the RQFII scheme launched in 2011 represent two important channels available to foreign investors for entering into China’s capital market.

The QFII scheme allows a global institutional investor, meeting certain qualifications and conditions, to move international capital onshore to invest in a limited scope of Chinese capital markets. As similar to QFII scheme, the RQFII scheme is a modified version intended to internalize the Chinese currency. RQFII allows the use of RMB funds raised in Hong Kong by the subsidiaries of Mainland domestic fund management companies and securities companies to invest in the mainland China security market.

It is worth mentioning that starting from 31 January 2019 the QFII scheme and RQFII scheme are subject to a combined set of administrative regulations and share the same expanded investment scope which covers A-share, stocks listed on the same investment scope as that of QFII scheme which covers A-share, stocks listed on the National Equities Exchange and Quotations (NEEQ), bonds, public investment funds, stock index futures, private investment funds, option, etc.

Quota Restrictions

From the start of launch, both QFII and RQFII schemes are subject to quota restrictions management with an initial quota of RMB 20 billion imposed respectively. Over time, the cap limits have been increasing. In January 2019, the total allowed QFII quota doubled from USD 150 to USD 300 billion, while the RQFII quota was set at RMB 1,940 billion with the aim of meeting the demand from overseas investors to expand investment in China's capital market.

Now following the new announcement of SAFE on 10 September 2019, the above quota restriction management has been completely abolished which indicates that foreign investors are no longer required to obtain approved investment quota before investing into the China’s capital market.

Additionally, it also deserves to mention that the RQFII scheme was originally available only to financial institutions in 19 countries and regions. Following the announced reforms, the jurisdictional limit on the RQFII scheme also will be lifted and will be available to qualified foreign institutions worldwide.

Implications and Outlook    

In a SAFE's press conference, it was further added by SAFE that relevant regulations will be soon revised to implement this new reform. It is envisaged that, in the future, foreign investors that have obtained the relevant qualifications approved by CSRC will only need to go through a registration process. Domestic custodian banks will be able to assist foreign investors with such registration in order to obtain a registration certificate issued by SAFE. Therefore, the convenience for foreign investors to participate in the China’s financial market will be greatly improved again, and makes China’s bond and stock market better and more widely accepted by the international market.