The Qualified Foreign Institutional Investor (QFII) program grants licensed international investors access to mainland China’s vibrant stock exchanges.
A New Era of Access to China’s Stock Market
Introduced in 2002 by the People’s Republic of China, the QFII program broke new ground by allowing foreign institutional investors to trade on the Shanghai and Shenzhen exchanges. Prior to its launch, foreign investors were barred from these markets due to stringent capital controls.
Key Insights
- Launched in 2002 by China’s government, the QFII program enables licensed international investors to tap into China’s stock exchanges.
- QFII allows participants to buy and sell yuan-denominated “A” shares of Chinese companies, significantly broadening their investment horizons.
- The related Renminbi Qualified Foreign Institutional Investor (RQFII) initiative offers even fewer restrictions, facilitating easier direct investments in China’s financial markets.
Understanding the Qualified Foreign Institutional Investor (QFII) Program
Since its inauguration, the QFII program has authorized licensed institutional investors to purchase and sell yuan-denominated “A” shares—equity in mainland China-based corporations. However, access was restrained by specific quotas established by the Chinese government, designed to control the level of foreign investments.
Starting from an initial quota of $30 billion, the limit was raised to $80 billion by 2012. In 2019, China’s State Administration of Foreign Exchange (SAFE) took a notable step by removing these quota restrictions entirely to encourage more foreign capital inflow.
Broadened Investment Scope Under QFII
Through the QFII framework, allowed investments extend beyond equities to include treasury bonds, corporate debentures, convertible bonds, and other instruments sanctioned by the China Securities Regulatory Commission (CSRC). By 2019, nearly 300 global institutions had obtained QFII quotas, accounting for around $111.4 billion.
QFII Investor Qualifications
Upon its launch, the QFII program had stringent requirements managed by the CSRC. For instance, fund management companies needed five years of asset management experience and at least $5 billion in assets under management for the last fiscal year. A designated amount of foreign currency, converted to local currency, was also mandated.
Key reforms were introduced starting in 2016 to ease these prerequisites, simplifying the rules and eliminating the need for specific asset management history and asset volume in 2019.
Comparing QFII with RQFII Programs
Initiated in December 2011, the RQFII program shares a fundamental resemblance with QFII but offers laxer constraints. For instance, RQFII participants can invest directly in domestic capital markets without converting foreign currency to renminbi, enhancing the ease of access for international investors.
Noteworthy Considerations for QFII Program
Before June 2018, foreign institutions could repatriate only 20% of their investments monthly through the QFII scheme, with a three-month “lock-up” for first-time fund repatriations. These constraints have since been lifted, along with a favorable addition allowing hedging for foreign exchange risk management.
These progressive rules underscore China’s commitment to making its financial markets more appealing to international investors. Additionally, a future amalgamation of the QFII and RQFII programs is being orchestrated as part of China’s drive to enhance foreign investment.
Exploring the Qualified Domestic Institutional Investor (QDII) Initiative
Launched in 2006, the QDII designation permits China’s insurance companies, banks, trust companies, funds, and securities firms to invest in international markets, thereby balancing outbound capital flow.
Conclusion: Insights on Impact of the QFII Designation
Prior to 2002, foreign investors faced stringent barriers to investing in China’s stock markets. The introduction of the QFII program significantly mitigated these capital control hurdles, allowing foreign institutional investors selective access to the Shanghai and Shenzhen exchanges.
How U.S. Individuals Can Engage with Chinese Investments
U.S. investors cannot qualify as QFII under the program. However, accessing Chinese stocks is feasible through American Depositary Receipts (ADRs) of Chinese firms listed on U.S. exchanges or by investing in ETFs that track Chinese financial markets.
Related Terms: Renminbi Qualified Foreign Institutional Investor (RQFII), Qualified Domestic Institutional Investor (QDII), Asset Management, Capital Controls.
References
- Paul Weiss. “Qualified Foreign Institutional Investor (QFII) System Enacted – Large Foreign Investors Now Permitted Access to China’s A Share Markets.”
- CNBC. “China to scrap foreign investment quotas to attract more money into its stock, bond markets”.
- Central Bank of Malaysia. “Renminbi Qualified Foreign Institutional Investor (RQFII) Licence Open for Application”.
- Asia Securities Industry & Financial Markets Association. “Foreign Investment in China”.
- Simmons + Simmons. “Regulatory update on the QFII reforms”.
- KPMG. “China’s Capital Markets”, Page 9.
