What foreign investors need to know about China’s QFII Programme

The QFII programme allows licensed international investors to trade Chinese securities, including stocks, bonds and other financial instruments, without needing to incorporate a domestic entity. Since its inception, the programme has undergone various reforms, focusing on market access and regulatory efficiency.

This article summarises the programme for multinationals considering expansion into China.

Background

In 2002, China unveiled the QFII programme to enable foreign institutional investors from investment banks, mutual funds and hedge funds from the US, Europe and Hong Kong to participate in its stock markets.

As of the end of May 2024, 832 institutions have been approved for qualification licences since 2003, covering more than 40 countries and regions worldwide. Notable asset management institutions such as the IMF, Oman Investment Authority and Delta Capital have participated in the QFII programme, drawing significant attention from the global investment community.

Initially, the programme had stringent qualification criteria, including thresholds for assets under management (AUM) and a history of responsible investment practices and regulatory compliance. These criteria, along with a complicated application process and operational hurdles, presented significant challenges for investors over the years.

Programme summary, including reforms

Chinese regulators have consistently adjusted the QFII programme’s rules to address investor challenges. These adjustments have helped to:

• Promote transparency
• Strengthen investor protections
• Reduce red tape
• Better align China’s financial markets with international standards
• Grant access to A-shares, bonds and other financial instruments
• Increase diversity in China’s investor base

QFIIs are increasingly investing in the A-share market. According to Wind data, by the conclusion of the first quarter of 2024, 720 companies were featured in the QFII programme’s significant holdings of tradable shares, with the aggregate market value of these holdings reaching a substantial RMB 105.12 billion at the end of the quarter.

These reforms have contributed to China becoming the world’s second-largest asset management market, attracting investors from over 40 markets globally. According to McKinsey & Company, China’s asset management industry is projected to more than double in size to 280 trillion yuan (US$40.4 trillion) by 2030.

Key changes to the QFII programme that multinational investors should be aware of include:

• Elimination of investment quotas: In 2019, the State Administration of Foreign Exchange (SAFE) lifted quota restrictions for QFIIs and Renminbi Qualified Foreign Institutional Investors (RQFIIs) to attract more long-term foreign investment. RMB-qualified investors under the RQFII programme are allowed to use offshore RMB to invest in China’s domestic financial markets. However, authorities retain the ability to reinstate quotas and adjust thresholds at any time.
• Simplified application procedures: The QFII programme now features a faster application process, reducing review and approval times from 20 working days to around 10, following reforms introduced in 2018.
• Expanded investment scope: Since 2020, permissible investments have broadened to cover a wider array of financial instruments, such as private securities investment funds and commodities futures.
• Relaxed ownership restrictions: Initially, foreign investors under the QFII programme were required to hold minority stakes and form joint ventures with local partners. In 2020, China scrapped ownership limits in almost all areas of its financial sector, allowing up to 100 percent foreign ownership.
• Enhanced currency flexibility: In 2013, authorities made changes allowing QFIIs to repatriate funds and convert currencies with greater ease, improving liquidity management for foreign investors and aligning China’s policies with international standards for capital mobility.

Investors outside China should note that, despite the significant reforms to the QFII programme, it still presents challenges for global asset management companies.

These challenges include understanding:

• How to qualify for the programme
• How to obtain the QFII licence, including the process and required documents
• How to fulfill China's foreign exchange administration requirements
• Additional compliance requirements and tax implications

To fully understand these and related challenges, investors should seek local third-party guidance before beginning the QFII registration process.