On 12 June 2018, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) issued the Provisions on the Foreign Exchange Administration of the Securities Investment in the Mainland by Qualified Foreign Institutional Investors and the Circular of the PBOC and SAFE on the Administration of the Securities Investment in the Mainland by RMB-Qualified Foreign Institutional Investors, to aid the repatriation of capital and the management of foreign exchange risks in association with securities investments of qualified foreign institutional investors (QFIIs) and RMB-qualified foreign institutional investors (RQFIIs). With effect from 12 June 2018, the new rules:
(1) Remove the three-month lock-up period on repatriation of principal and the 20% limit on repatriation of principal and profit of QFII investments. Under the previous rules, a QFII could only repatriate principal and profits of its securities investments by installments, after a three-month lock-up period. The aggregate amount (including principal and profits) that a QFII repatriates within any month cannot exceed 20% of the total assets it held in China at the end of the year before that month; and
Remove the three-month lock-up period and the 20% repatriation limit means a QFII can now repatriate, based on its needs, principal and profit of its securities investment in China at any time. However, under the new rules SAFE retains its power to exercise macro prudential supervision over the repatriation of capital by QFIIs, based on China’s financial situation, FX market supply and demand, and international balance-of-payment position. It means, if needed, SAFE may continue to impose temporary restrictions on QFII repatriation using the so-called “window guidance”.
(2) Allow a QFII/RQFII to hedge exchange rate risk by entering into CNY-FX derivative transactions. The new rules allow a QFII/RQFII to trade derivatives with its custodian or other banks in China, which hold requisite derivative licences, to hedge the exchange rate risk arising from currency conversion. The new rules also set out the requirements a QFII/RQFII should comply with when engaging in derivative transactions. These include the following:
- Any derivative transaction a QFII/RQFII enters into must be based on its genuine business needs and only to hedge the exchange rate risk arising from its onshore securities investment.
- The exposures under the derivatives a QFII/RQFII enters into must have a “reasonable correlation” with its underlying securities investments in China. Specifically, the aggregate exposure under derivative trades of a QFII/ RQFII should not exceed the RMB asset volume (other than saving account assets) under its securities investments in China at the end of the month immediately preceding the trades.
- The exposure to derivatives a QFII/RQFII held could be adjusted on a monthly basis. Any such adjustment must be done within five working days following the end of each month, based on the RMB asset volume under the securities investment in China of a QFII/RQFII as calculated by the custodian bank.
- The current regulations on the permissible types of derivative transactions and settlement requirements will apply to QFII/ RQFII. In this regard, it is notable that SAFE has permitted, on 12 February 2018, the trading of RMB-FX non-deliverable forwards in China.
Since late 2017, the central government has pledged to further open its financial sector on various occasions. These new rules mark the regulators’ efforts to adjust the QFII/RQFII regime and make it more attractive for foreign investors to invest in the A-share market. A QFII/RQFII with an existing fund, using the QFII/RQFII quota, is advised to revisit the fund documentation and update it to reflect the new policies.