The Chinese Securities Regulatory Commission (CSRC), the People’s Bank of China and the State Administration of Foreign Exchange (SAFE) jointly announced a pilot programme on 16th December 2011 which became effective on the same date. The Pilot Program for Asset Management and Securities Companies to Qualify as RMB Qualified Foreign Institutional Investors Measures allows renminbi raised in Hong Kong by Hong Kong subsidiaries of Chinese domestic fund management companies and securities companies to be invested in China’s domestic securities markets. Under the pilot programme, the initial investment quota is RMB20 billion (US$.1 billion), 80% of which is required to be invested in fixed-income securities, leaving 20% available for the equity markets.
To qualify for approval as an RMB Qualified Foreign Institutional Investor (RQFII), the Hong Kong subsidiary shall have been approved by the Hong Kong Securities and Futures Commission to conduct an asset management business and shall maintain its asset management business in sound financial and credit status; the Hong Kong subsidiary shall have an effective corporate governance structure and internal control system, and its employees shall satisfy the requirements of licensed individuals in Hong Kong; the Hong Kong subsidiary and its parent company in mainland China shall conduct business in accordance with the relevant regulations and shall not have been assessed for any substantial penalties by its local regulators over the three years prior to application; The Hong Kong subsidiary’s parent company in mainland China shall be qualified to conduct a securities asset management business; and the Hong Kong subsidiary shall satisfy other criteria‚ as stipulated by the CSRC‚ based on prudent regulatory principles.
The Hong Kong subsidiary must first apply to the CSRC for a securities investment license. The CSRC will, within 60 days from the date when the full set of application documents is received, determine whether to grant approval. After obtaining a securities investment license, the Hong Kong subsidiary must apply to SAFE for an investment quota. SAFE shall, within 60 days from the date when the full set of application documents is received, determine whether to grant the requested quota.
The RQFII scheme is effectively an RMB-settled version of the pre-existing QFII scheme which is foreign-currency settled. Under the current QFII scheme which was launched in 2002, an authorized foreign institutional investor is permitted to convert foreign currency into RMB to invest in PRC securities. The two schemes are intended to run hand in hand with each other with separate quotas being allocated.
Observers say that this pilot programme represents another step for China to achieve its long-term goal to increase the attractiveness of the renminbi as an international currency. It comes at a time when foreign exchange is reportedly flowing out of mainland China, and it may help to offset recent capital outflows and to ease tightening liquidity in mainland stock markets. While the programme’s effect is expected to be limited given the small size of the new quota, it represents yet another move to liberalize China’s restricted capital markets.