China Removes Quota Restrictions on QFII and RQFII

Introduction

On 10 September 2019, the State Administration of Foreign Exchange (“SAFE”), mainland China’s foreign exchange regulator, announced the abolition of investment quotas for the Qualified Foreign Institutional Investor (“QFII”) and Renminbi Qualified Foreign Institutional Investor (“RQFII”) schemes.

Since the launch of the QFII and RQFII schemes in 2002 and 2011 respectively, more than 400 institutional investors from 31 countries have been granted quota to participate in mainland China’s securities market¹.

SAFE has not announced a timeline for the lifting of the relevant quotas but has committed to immediately revise the relevant regulations to make it clear that QFII and RQFII investors will no longer need to apply for quota.

Impact on Irish Fund Management Companies

Since December 2016, Irish fund management companies have been able to apply for RQFII quota. Ireland was granted an RMB 50 billion quota but with the latest announcement from SAFE this limit is soon to be abolished.

Once the new rules are implemented, it is excepted that an Irish fund management company which has been granted RQFII quota will not be limited to just that quota, but will be able to invest any offshore Renminbi that it holds in mainland China’s securities markets.

For Irish fund management companies that have not yet applied for RQFII quota but are considering doing so, it is expected that the application process will be revised to reflect that it is no longer an application to obtain quota but rather to register as an RQFII investor.

Further Reforms to QFII and RQFII Expected

Many of the world’s largest international asset managers have established wholly foreign-owned foreign enterprises (“WFOEs”) in Shanghai which have been granted private fund management (“PFM”) licences by the Asset Management Association of China. PFM licences allow WFOEs to establish domestic funds in mainland China targeted at professional investors and high-net worth individuals.

A challenge currently faced by many WFOE PFMs is seeding their initial domestic funds. Chinese and international investors alike expect managers to provide the initial investment in their products in order to establish a track record of performance.

Earlier this year the China Securities Regulatory Commissions (“CSRC”) published a consultation paper on the QFII and RQFII schemes and as part of that consultation proposed allowing WFOE PFMs to seed their domestic PRC funds with QFII and RQFII quota. While the 10 September announcement did not make reference to the implementation of this change, it is still anticipated that this will be introduced in 2020. 

Conclusion

The abolition of QFII and RQFII investment quotas is a welcome development for the Irish funds industry. In line with recent announcements from index providers concerning increased inclusion of China equity and fixed income securities in worldwide indices, it is expected that greater allocations to the Chinese market will increasingly become a feature of Irish domiciled funds. The removal of QFII and RQFII investment quotas is likely to assist in that allocation process.

If you would like further information, please liaise with your usual Maples Group contact or any of the contacts listed below.

¹SAFE Dispatch, Abolish Restrictions on Investment Quota of Qualified Foreign Investors (QFII/ RQFII) and Further Expand the Opening up of Financial Markets (http://www.safe.gov.cn/en/2019/0910/1552.html)