China liberalizes capital repatriation, allows foreign exchange hedging

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”.