China regulator drafts QFII, RQFII 'merger' plans

Draft rules for the merger of the QFII and RQFII schemes will soon be published by China’s financial regulator, a senior lawyer has announced.

Combining the qualified foreign institutional investor (QFII) scheme and its renminbi equivalent (RQFII) would be seen as part of China’s broader attempt to liberalise its capital markets.

Meanwhile Luxembourg’s Ambassador to China has prematurely announced that his country is to be awarded Rmb80 billion in RQFII quota, before regulators have had a chance to officially reveal the news.

Sandra Lu, Shanghai-based partner at Llinks Law, told a conference on Monday that the China Securities and Regulatory Commission (CSRC) was close to finalising the legal framework for the merged scheme.

“Currently, the QFII and RQFII are two different regimes in China, but as far as we know, the [CSRC] is drafting new rules to merge QFII and RQFII into one legal regime,” said Lu.

But Lu, who provides legal advice to mainland Chinese regulators on new legislation, noted that the CSRC has to consult with other financial watchdogs, including the China Banking Regulatory Commission, before releasing draft rules.

“As far as we know, the new draft is almost ready, but there are still some issues that are outstanding,” Lu said on Monday at the annual Luxembourg Investment Fund Seminar in Hong Kong.

QFII holders are expected to be the biggest beneficiaries of the CSRC’s reforms, which will see it abolish the scheme’s current restrictions on investor types and investment rules.

Fund houses, for example, will no longer need to have at least two years of operating history and $500 million in assets under management before making a QFII application, which would bring it into line with current RQFII rules.

QFII could also see the removal of its existing three-month lock-up period in open-ended China funds, which does not exist in its renminbi equivalent.

In addition, QFII funds could also enjoy the higher levels of liquidity and looser subscription and redemption rules which RQFII funds currently enjoy. Currently, QFII funds can only repatriate or remit assets on a weekly basis, and in certain cases need approval from the State Administration of Foreign Exchange.

“We believe that this new rule will benefit QFII a lot and will make QFII products more efficient,” said Lu. “But I think it will bring in a lot of legal documentation work.”

Alwyn Li, partner at Hong Kong law firm Deacons, praised the move to boost QFII schemes, which may become more popular since global investors could use dollars to invest instead of the less liquid offshore renminbi scheme under RQFII.

"The two schemes are quite different,” he said. “If you look at what happened, the first batch of RQFII holders went back to apply for QFII so as to offer a wider variety for their clients."

Separately, Luxembourg’s ambassador to China, Paul Steinmetz, announced in the seminar’s opening speech on Monday that his country has received an Rmb80 billion RQFII quota.

The award has not yet been announced by the People’s Bank of China (PBOC) and the Central Bank of Luxembourg, but Steinmetz said it would be made public soon.

“A quota, a figure has been agreed on between ourselves and the [central bank],” Steinmetz said. “It will be the same figure as one which was given to Paris and Frankfurt. So we’re quite happy about this and we’re just waiting for the right time for both governments to announce it, and it will be quite soon.”

Frankfurt and Paris were each awarded an Rmb80 billion RQFII quota last year.

The news would complement the designation of ICBC as Luxembourg’s renminbi clearing bank last September. ICBC would be able to tap directly into China’s onshore currency markets to add liquidity to Luxembourg’s offshore renminbi market.

Fund managers looking to tap into the quota for its funds would be able to benefit from the Ucits passporting regime, which would allow funds to be sold across the 28 markets that make up the European Union.

But the appeal for fund managers could be found more immediately within its own borders, given that Luxembourg is already home to Rmb80 billion in bank deposits.

But one question raised at the seminar was whether Hong Kong, Singapore or other jurisdictions closer to the mainland market would be able to use Luxembourg’s RQFII quota.

Currently, a Luxembourg fund manager launching a Luxembourg-domiciled fund without an RQFII quota can still run a RQFII fund as long as it engages a sub-advisor or sub-manager that does have the quota, such as in Hong Kong.

But Lu said it remains unclear whether Hong Kong can act as a sub-manager under Luxembourg’s RQFII quota, given that RQFII rules dictate that the quota holder must have “investment discretion”, which in this case is in Luxembourg.

One glimmer of hope however would be how the Chinese regulators define “investment discretion”, which until this day has not been fully explained.

The PBOC and the CSRC did not respond to AsianInvestor’s requests for comment.