A qualified foreign institutional investor (QFII) is a professional foreign investor licensed to trade renminbi-denominated securities in China's mainland stock exchanges.
Prior to the QFII program's launch in 2002, foreign investors were unable to buy or sell shares on China's stock exchanges in Shanghai and Shenzhen because of the country's tight capital controls. Even though China had already developed into a large and vibrant securities market, the proportion of institutional investors in the country lagged far behind that of other developed markets. That seriously restricted the development of capital markets and investment in China.
Under the QFII program, licensed foreign investors may make investments in local Chinese securities markets through special purpose accounts by converting a certain amount of foreign currency into renminbi. Capital gains and dividends can be converted back into foreign currency for repatriation by the investor, subject to the regulations.
The quota, products, accounts and fund conversions by foreign investors are strictly monitored and regulated by the Chinese authorities.
Qualified foreign institutional investors include asset managers, insurance companies, securities firms, commercial banks, pension funds, charitable foundations, endowment funds and sovereign wealth funds. To qualify, these organisations must meet the following criteria:
- Be reputable and financially sound with a solid team of qualified professionals.
- Have no record of disciplinary action imposed by regulators in the last three years.
- Sign a Memorandum of Understanding with the applicant's securities regulator and the China Securities Regulatory Commission (CSRC).
- Meet minimum requirements for operating history and assets under management.
Investment Quotas Under QFII
Investment quotas are granted to QFIIs by the State Administration of Foreign Exchange (SAFE). Initially, the total investment quota available under the QFII Program was US$10 billion. That amount was then increased to US$30 billion in 2007 and to US$80 billion in 2012.
According to a special edition brochure on the subject by PricewaterhouseCoopers China, the largest accounting firm in China, the QFII program since its introduction "has been enriching the investment structure of the domestic capital market, promoting the quality of listed companies, enhancing the internationalisation of the domestic capital market, and raising general awareness of the economic and social development in China around the globe."
The RQFII Program
In late 2011, the QFII program was expanded to include the use of offshore renminbi funds raised in Hong Kong by the subsidiaries of domestic fund management companies and securities companies in Hong Kong to invest in China's mainland domestic securities market. Under this RMB Qualified Foreign Institutional Investor (RQFII) program, a Hong Kong subsidiary must obtain the approval of the CSRC and an investment quota approved by SAFE.
The CSRC initially set the quota for RQFII at 20 billion renminbi, divided among a number of companies, all of which were subsidiaries of mainland China asset managers. The quota was later raised to ¥70 billion and then to ¥270 billion by November 2012. It was further raised to ¥500 billion in July 2017.
Restrictions were also imposed on the types of asset classes that RQFII investors could invest in. The CSRC determined that 80% of the quota should be invested in mainland fixed-income markets and the remaining 20% in stock markets. The agency was concerned that large amounts of money entering the mainland stock markets would cause volatility.
Differences Between QFII And RQFII
Essentially, the main difference between the QFII and the RQFII is that a QFII uses its foreign home currency to invest in China while a RQFII uses offshore renminbi from Hong Kong. As of February 2016, 279 foreign institutions have been granted QFII licenses, while 158 foreign institutions have been granted RQFII licenses.
The Qualified Foreign Institutional Investor (QFII) program was created in 2002 to allow foreign investors to invest directly in China's capital markets by converting foreign currency into renminbi. In 2011 the program was expanded to include the use of offshore renminbi funds raised in Hong Kong by the subsidiaries of domestic fund management companies and securities companies. Investments in mainland China by foreign investors are strictly regulated and controlled by the government.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…