China’s SAFE relaxes QFII quota and funds flow restrictions
On 4 February 2016, amidst relative calm not seen in China’s currency markets since the August 2015 RMB devaluation, SAFE unveiled its first major reforms for the year that are aimed at further liberalisation of cross-border capital flows in China.
The reforms provide greater flexibility for participants in the Qualified Foreign Institutional Investor (QFII) programme, by increasing the amount of quota available under the programme and simplifying the rules on how the quota (on a combined basis with the quota under the Renminbi Qualified Institutional Investor (RQFII) programme) is determined and awarded. At the same time, the new rules allow earlier repatriation of invested funds by reducing the lock-up period, and relax certain other restrictions on the inbound and outbound remittance of funds by QFIIs.
Some of the key changes of the reforms include:
Expansion of QFII investment quotas
The new rules have abolished the requirement for QFIIs to obtain SAFE approval of investment quotas on a case-by-case basis, and make it easier for QFIIs to increase their quotas, as follows:
- In place of the need to obtain SAFE approval of each investment quota, under the new rules a QFII can make a filing with SAFE for a "base investment quota" of up to a maximum amount, to be set within a range of US$20 million to US$5 billion (increased from the previous upper limit of US$1 billion). The specific maximum base investment quota of a QFII (other than a sovereign wealth fund, central bank or monetary authority, all of which are not subject to the quota restriction) is calculated as follows:
- for QFIIs whose assets are mainly outside the PRC, US$100 million plus 0.2% of average asset size in the last three years minus RQFII quota obtained; and
- for QFIIs whose assets are mainly in the PRC, RMB5 billion plus 80% of previous year’s asset size minus RQFII quota obtained (in US dollar equivalent)
- As no SAFE approval requirement applies, the quota can be obtained by the QFII’s onshore custodian making, after it has verified the QFII’s entitlement to the amount of quota sought, a filing with SAFE. The same filing process applies to an increase which does not result in the QFII’s cumulative investment quota exceeding the base investment quota. The filing must be completed by the 10th day of the month and if it is accepted, SAFE will provide the filing information to the custodian.
- A QFII may also seek additional quota in excess of the base investment quota. This requires the onshore custodian to apply to SAFE for its approval.
- If a QFII which has already obtained a quota under the old rules seeks to expand its current quota, the new rules only require a filing to be completed with SAFE. However, to the extent its quota exceeds, or will exceed, its base investment quota (as described above), SAFE approval will be required.
QFIIs may repatriate their investments earlier
- The new lock-up period for all QFIIs to repatriate their investment principal is 3 months starting from the date on which the inbound remittance of investment principal by the QFII reaches a total of US$20 million or its equivalent (which is also the minimum amount of a QFII investment quota under the new rules).
In contrast, under the old rules:
- the lock-up period was 1 year, with a shorter period of 3 months for pension funds, insurance funds, mutual funds, charitable funds, endowment funds, government and monetary authorities and open-ended China funds established by QFIIs; and
- the lock-up period commenced when the QFII’s investment principal is fully paid in or (if the quota is not fully utilised) six months after SAFE approval of the quota.
- The monthly net repatriation cap applicable to all QFIIs (being 20% of its total onshore assets as at the end of the previous year) following the expiry of the lock-up period remains the same.
Inbound and outbound remittances
- Under the previous regime, the investment principal was required to be remitted into the PRC within 6 months of approval of the quota by SAFE, failing which the principal could not be remitted into the PRC without further approval of SAFE (a single extension of 6 months was available on application).
- The new rules have abolished the 6-month deadline, with the remaining restriction being that an investment quota which is not utilized within one year of filing being made or approval obtained can be fully or partially revoked by SAFE at its discretion.
- Previously, the amount of investment principal remittable outside China by an open-ended China fund in a net redemption position was determined in accordance with the ratio of the fund’s investment principal to profits and losses. The new rules have abolished this express requirement.
- Other flexibilities in the remittance process have been introduced, as below:
- Under the new rules, inbound and outbound remittances by an open-ended China fund may be conducted on a daily basis, as opposed to a weekly basis under the old rules.
- Previously, the amount of investment principal which an open-ended China fund in a net redemption position could remit into the PRC was limited to the amount which it had remitted outside China (determined in accordance with the ratio of the fund’s investment principal to profits and losses). The new rules have abolished this restriction.
- QFIIs now need to give 30 business days’ prior notice (extending the period of 10 business days under the old rules) when instructing their onshore custodians to convert foreign exchange funds to RMB for investment or other purposes.
Rules on Foreign Exchange Administration of Securities Investments in the PRC by Qualified Foreign Institutional Investors, State Administration of Foreign Exchange (“SAFE”), 4 February 2016