China’s ambition to further opening-up its financial market to foreign investors

On 25 September, the China Securities Regulatory Commission (“CSRC”), People’s Bank of China and the State Administration of Foreign Exchange (“SAFE”), jointly issued the long-awaited Administrative Measures for Domestic Securities and Futures investment by Qualified Foreign Institutional Investors and Renminbi Qualified Foreign Institutional Investors (the“Administrative Measures”), signifying China’s ambition of continuous opening-up of its financial market to foreign investors. In the meantime, SCRC released the ancillary rules titled Provisions on Issues Concerning the Implementation of the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (the “Implementation Provisions”) which further clarifies and facilitates the implementation of the Administrative Measures.

With both the Administrative Measures and the Implementation Provisions coming into effect as of 1 November 2020, bringing in a further relaxed regulatory landscape of China’s capital market for foreign institutional investors, a growing influx of foreign capitals entering the world’s second-largest financial market can be anticipated.

Below we will briefly set out the key historical regulatory developments with respect to qualified foreign institutional investors over the past years, and highlight the major changes introduced by the new Administrative Measures and Implementation Provisions.

Background of the new Administrative Measures and Implementation Provisions
As introduced in our previous legal alert released in November 2019, the Qualified Foreign Institutional Investors (“QFII”) and RMB Qualified Foreign Institutional Investors (“RQFII”) schemes represent two important channels that allow foreign institutional investors to access China’s growing financial markets.

The QFII scheme enables foreign institutional investors meeting certain qualifications and conditions to move their offshore foreign currency to China’s financial markets, while the RQFII scheme, a modified version of the QFII scheme,  facilitates foreign investment in the mainland via offshore renminbi accounts. The RQFII program was first limited to Hong Kong subsidiaries of Chinese financial institutions only and then expanded to financial institutions in London, Singapore, Taiwan, and other yet-unnamed locations. Currenty, the restrictions on RQFII pilot countries and regions have been completedly cancelled.

Since the launch of QFII and RQFII schemes in 2002 and 2011 respectively, the limitations under both schemes have gradually become more relaxed.

In the file below, we summarize the historical key developments of QFII and RQFII schemes throughout the years before the Administrative Measures and Implementation Provisions:

Table | summary of the historical key developments of QFII and RQFII schemes throughout the years before the Administrative Measures and Implementation Provisions

New changes brought by the Administrative Measures and Implementation Provisions

The new changes brought by the Administrative Measures and Implementation Provisions can be summarized into the following five aspects:

1. Integrating the seperate rules regulating QFII and RQFII schemes into one regime
   Given the steady progress of RMB internationalization in recent years, and in order to introduce more long-term overseas funds and prevent regulatory arbitrage, the administrative Measures combined QFII and RQFII as “qualified foreign investors” applicable to unified access qualification requirements.
    
2. Lowering the access barriers
   The Administrative Measures have relaxed the access conditions, simplified application documents, and shortened the time limit for examination and approval of qualified foreign investors.
    
3. Updating the custodian system to give qualified foreign investors more choices
   The Administrative Measures delete the requirement of “paid-in capital of not less than 8 billion yuan” in the custodian qualification access conditions; remove the restriction on the number of custodians; delete the provisions of approval procedures for custodian qualifications which are replaced by a post-record-filing system.
    
4. Siganificant expansion of the investment scope

   - NEEQ: according to the Administrative Measures, qualified foreign investors can invest into the securities quoted on the national equities exchange and quotations (“NEEQ”), an over-the-counter (OTC) national securities trading market, providing an alternative finance method to list for Chinese small and medium size enterprises (SMEs) who cannot list on the Main Board market.

   - Financial Futures contracts: The Administrative Measures remove the requirement for “hedging purpose only” when (R)QFII invest in stock index futures contracts on the China  Financial Futures Exchange (“CFFEX”), with expansion for (R)QFIIs to trade in CFFEX financial futures contracts beyond the stock index futures.

   - Commodity futures contracts: The Administrative Measures regulate that the list of eligible futures contracts available to qualified foreign shareholders will be approved by the CSRC separately. Such rules provide the possibility to broaden the product list, which now only has five types of onshore futures contracts (crude oil, iron ore, PTA, TSR20 and low Sulphur fuel oil).

   - Private securities investment funds: Although the investment by foreign qualified investors in the private investment fund category is not new in practice, the New Measures have now codified this regulatory practice.

   - Bond repos: The Administrative Measures expand qualified foreign shareholders’ access to bond repos traded in the Shanghai Stock Exchange and Shenzhen Stock Exchange.

5. Strengthening continuous supervision
   While liberalizing the market, the CSRC pointed out that the supervision should be strengthened. That is, to achieve cross-market supervision and cross-border supervision, strengthen the punishment of violations, and refine the regulatory measures applicable to specific violations.

Outlook
A series of measures to open the market and facilitate foreign institutions to enter the Chinese financial market will further increase the attractiveness of the A-share market and China’s bond market to foreign capital. As a result, foreign capital may increasingly become a force that cannot be ignored in China’s capital market in the near future.