The limit for foreign institutional investors to invest in China domestic securities will be lifted

Updated: May 12, 2020

In the short term, there will not be a large amount of overseas capital inflows. In the medium and long term, foreign countries will further allocate in Chinese capital market.

The limit for foreign institutional investors to invest in domestic securities will be lifted.

On May 7, the People ’s Bank of China and the State Administration of Foreign Exchange issued the “Regulations on the Management of Domestic Securities and Futures Investment Funds for Overseas Institutional Investors” (hereinafter referred to as the “Regulations”), which clarifies and simplifies the requirements for the management of securities investment funds for domestic securities transactions by overseas institutional investors To further facilitate the participation of foreign investors in the financial markets of developing countries. The Regulations will be effective on 6th of June 2020.

QFII / RQFII domestic investment quota cancellation

The "Regulations" will implement the abolition of the requirements for the management of domestic securities investment quotas for qualified foreign institutional investors (QFII) and RMB qualified foreign institutional investors (RQFII) (hereinafter referred to as "qualified investors").

According to the requirements, after obtaining the Securities and Futures Business License of the Securities Regulatory Commission, the qualified investor should entrust the main reporter to submit the registration form of the overseas institutional investor and a copy of the license of the securities and futures business to the State Administration of Foreign Exchange for business registration.

Fully liberalizing the investment restrictions of QFII and RQFII will help the world to be optimistic about China's development funds and enter the Chinese investment market more fully. For a long time, as one of the most important emerging markets, China is also an attractive market for global value investment. In addition to the additional liberalization restrictions, further optimizing supporting measures and simplifying related financial procedures will help improve the efficiency of capital flow allocation.

Although the domestic securities investment quota for qualified investors will be cancelled, it is worth mentioning that the current QFII / RQFII quota utilization rate is limited, far from reaching the total quota limit.

According to the latest statistics from Oriental Fortune Choice, a total of 292 qualified foreign investors have been approved for a QFII investment quota of US $ 114.6 billion, which is only 38.2% of the total utilization rate of US $ 300 billion; and the total RQFII quota is 1.99 trillion yuan. A total of 262 overseas institutions were approved with an investment quota of RMB 713.092 billion, and the total RQFII utilization rate was only 35.8%.

"The cancellation of the QFII / RQFII quota is mainly used to boost market sentiment." A strategic analyst with a medium-sized brokerage in Beijing said that in view of the current limited use of QFII / RQFII quotas, the removal of quota limits in the short term will not bring a large inflow of overseas funds.

However, in the medium and long term, the abolition of QFII / RQFII investment quota restrictions has once again improved the convenience of foreign capital allocation of A shares. It is expected that foreign capital will further allocate China's capital market in the future. "In the context of the impact of the COVID-19 in overseas markets, foreign investors allocate further in A shares. The overall A shares are also at a low valuation level, and foreign investors will continue to allocate A shares. trend". The analyst said.

After the opening of the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect, the channels for foreign capital to flow in and out of A shares have been fully opened, and A shares have been successively included in the MSCI Emerging Market Index and other international indices. In the past two years, a large amount of foreign capital has flowed into the A-share market to compete for high-quality stocks such as “white horse stocks”. The annual inflow has reached about 300 billion yuan. In April, foreign capital returned to A shares for 53.3 billion yuan, and it is expected to accelerate into A shares in the future. The policies announced by the central bank today are good for the stock and bond markets, especially the technology leading stocks with relatively large inflows of foreign capital.

More domestic investment is on the way

In addition to lifting QFII / RQFII investment quota restrictions, the Regulations also provide more convenience to qualified investors. In the future, qualified investors will implement integrated management of local and foreign currencies in domestic securities investments, allowing them to independently choose the currency and timing of remitted funds.

The “Regulations” also greatly simplified the procedures for remittance of domestic securities investment income from qualified investors, canceled the requirements for materials such as special audit reports on investment income and tax filing forms issued by Chinese certified public accountants, and replaced them with tax payment commitment letters. In addition, the number of qualified investor custodians has been removed, allowing a single qualified investor to entrust multiple domestic custodians and implement the main reporter system.

At the same time, the complex financial innovation and higher transaction frequency of foreign-funded financial institutions will lead to cross-institutional and cross-market linkages through channels such as liquidity and product associations, bringing potential risks, but this reform has improved the domestic securities of qualified investors. Investment in foreign exchange risk and investment risk management requirements, the People's Bank of China and the foreign exchange bureau will also strengthen post-event supervision to reduce the risk of capital opening.

With the inclusion of A shares in MSCI, FTSE Russell, S&P Dow Jones and Barclays and other international mainstream indexes and steadily increasing the weight of inclusion, foreign investors' investment demand in China's financial market has increased accordingly. In recent years, the domestic financial industry has been opened to the outside world, and new measures to facilitate foreign investors to participate in China's financial market have emerged.

At the beginning of 2019, the CSRC solicited opinions from the public for the revision and integration of the "Administrative Measures on Domestic Securities Investment of Qualified Foreign Institutional Investors", "Pilot Measures for Domestic Securities Investment in Renminbi Qualified Foreign Institutional Investors" and related supporting rules, and proposed to include qualified overseas institutional investors (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) systems are combined into one, and foreign institutional investors only need to apply for qualification once. At the same time, the new plan also plans to expand the investment scope of QFII and RQFII to the areas of new third board stocks, private equity funds, futures and other fields.

The latest "Notice on Improving the Foreign Exchange Risk Management of Foreign Institutional Investors in the Interbank Bond Market" was also implemented in February this year to further facilitate foreign exchange risk management when investing in RMB bonds.

Translated and edited from Jiemian News