QFII & RQFII (Merging schemes of QFII and RQFII)

QFII

QFII (Qualified Foreign Institutional Investors), which is a program that allows foreign institutional investors to apply for the license in order to trade RMB denominated securities in China’s mainland stock exchanges by converting foreign currency to RMB within the quota obtained from relevant authorities. Foreign investors can hence make investments in the local securities market through special purpose accounts and their investments are under strict review. The investor must appoint local custodian bank to submit the application and provide the clearing settlement services, they must be approved by the China Securities Regulatory Commission (CSRC) and obtain a quota approved by the State Administration of Foreign Exchange (SAFE) to invest in the domestic securities market. The capital gains and dividends received can be converted back into foreign currency for repatriation upon approvals.

At present, qualified investors can invest in stocks and bonds traded on stock exchanges, fixed-income products traded in the China interbank bond market, stock index futures and other financial instruments approved by the China Securities Regulatory Commission (CSRC). By the end of June 2019, the total investment quota for QFII was USD 300 billion, with a total of 290 overseas institutions eligible for QFII qualification and approved for USD 109.996 billion.

RQFII

RQFII (Renminbi Qualified Foreign Institutional Investors), which is regarded as a extend program of QFII, it allows foreign institutional investors to apply for the license to invest its offshore renminbi funds in the Chinese onshore securities markets within the approved quota granted by the State Administration of Foreign Exchange (SAFE). To apply for the RQFII license and quota, foreign institutional investors will also need to find the appropriate Chinese local custodian bank to submit the application and provide the clearing settlement services.

The invest scope of RQFII is the same as QFII. By the end of June 2019, the total quota of RQFII scheme was RMB 1.99 trillion, there are 20 countries or regions having obtained the RQFII quota. Total of 217 overseas institutions have been qualified for RQFII and approved for RMB 677.97 billion.

Merging schemes of QFII and RQFII

However, due to the rapid development of the market, the relevant rules of the QFII and RQFII fail to accommodate to the new market environment. To solve the such issues, on the last day of Jan 2019, the China Securities Regulatory Commission (CSRC) published draft rules that would combine QFII and RQFII. These new rules aim to meet the demands of international institutions for better access, further improve the two schemes and also induce more long-term overseas capital to promote the healthy development of the Chinese capital market.

By adopting this new change, it would scrap quantitative criteria for the combined QFII, RQFII scheme and shorten the approval time for applications and expand the investment scope for oversea investors, which give foreigners the same range of investment options as local players. Furthermore, this new policy would allow foreign investors to trade on China’s over-the-counter stock venues, the National Equities Exchange and Quotations platform, as well as engage in margin trading and short selling transactions. If the proposals are approved, QFII will allow them to invest in domestic private funds. All these adjustments bring marvelous opportunities to investors around the world, especially for the investors who hope to get into the Chinese market.

Stock Connect

In addition to the QFII and RQFII schemes, the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect between Mainland China and Hong Kong provide important avenues for foreign investors to access China’s capital markets. The China-Hong Kong Stock Connect Program establish mutual trading links between the markets of mainland China and Hong Kong, which allowed foreign investors to trade selected China A-Shares through their Hong Kong based brokers. A QFII/RQFII license is not required to trade via Stock Connect.

The Shanghai-Hong Kong Stock Connect was formally launched in November 2014 and the Shenzhen-Hong Kong Stock Connect was officially launched in December 2016. However, Unlike QFII/ RQFII schemes which allows investors to invest in all listed shares and stock index futures, HK Stock Connect programs provide a much smaller investable universe: As of 25 July 2019, only 580 out of a total of 1,499 stocks listed on the Shanghai Stock Exchange and only 682 out of a total of 2,162 stocks listed on the Shenzhen Stock Exchange are eligible for trading through the HK Stock Connect (See HKEX for the full list of Eligible Stocks).

Additionally, unlike QFII/ RQFII schemes, there is no quota limitation for single institution to in invest in China A-Shares,

but there is a daily up limit of total capital flow between HK and Mainland China, once the daily quota is reached, orders to purchase additional A-shares through Stock Connect will be rejected. Daily buying limit of northbound trade is RMB 52 billion and buying limit of southbound trade is RMB 42 billion, which is high enough and won’t cause concern to individual institutions in normal circumstance. Stock Connect utilizes an omnibus clearing structure, and the fund’s shares will be registered in its custodian’s name on the Hong Kong Central Clearing and Settlement System.

CIBM Direct

In February 2016, China’s authorities took the unprecedented step of announcing that a wide range of foreign institutional investors would be given quota-free access to the Chinese Interbank Bond Market (CIBM). This marks a dramatic shift in the process of opening China’s capital markets, making it much easier for international investors to access the world’s third-largest bond market and gives foreign financial institutions access to a wide range of fixed income instruments. Through this scheme, global investors can invest in treasury bonds, local government bonds, central bank bill, financial bonds, corporate bonds, ABS, as well as a variety of derivative products such as IRS (Interest rate swap), FRA (Forward rate agreement), bond forwards, etc. There is no quota limit, but a global investor does need to register themselves with People’s Bank of China (China’s central bank) and State Administration of Foreign Exchange through a Bond Settlement Agent (usually a local bank) before opening trading account. Now there are 428 global institutions, including 76 central banks, participating in the China interbank bond market through CIBM Direct.

Bond Connect

Bond Connect is a new mutual market access scheme that is established to allow Mainland China and overseas investors to trade in each other’s bond markets through a linkage between the Mainland China and Hong Kong market infrastructures. Bond Connect complements QFII, RQFII and CIBM Direct Access schemes and is a step further to opening up onshore capital markets to overseas investors. Unlike other schemes, there is no quota requirement or need for investors to identify the intended investment amount. Northbound trading (that is, foreign investors investing in bonds traded on the China Interbank Bond Market (CIBM)) began on 3^rd July 2017, while Southbound trading will be explored at a later stage.

Prior to the launch of Bond Connect, CIBM Direct was a major investment channel for overseas investors to invest in the China onshore bond market. There is some difference between these two programs, under Bond Connect, account opening, trading and settlement can be conducted in the offshore market, whereas under CIBM Direct, the whole process is completed in the onshore market. Bond Connect provides a more centralized and systematic approach versus CIBM Direct where investors must rely heavily on onshore bond settlement agents. More importantly, Bond Connect enhances operational efficiency, simplifies the account opening process and shortens approval turnaround. But unlike CIBM Direct, investors cannot invest in derivative products (IRS, FRA, bond forwards etc,) through Bond Connect.

The scope of investable bonds under Northbound Trading will be consistent with the information specified in the relevant notices promulgated by the PBC, i.e. it covers all bonds tradable in the China Interbank Bond Market (CIBM), including Chinese government bonds, local government bonds, policy bank bonds, financial institution bonds and corporate debt instruments. The scope of eligible investors under Bond Connect is the same as the CIBM Direct scheme.