QFII (Qualified Foreign Institutional Investors) system is a special channel to open the securities market orderly and steadily in countries and regions where  capital markets have not yet been fully opened to foreign investors and it is a transitional institutional arrangement.

The issuance of the Interim Measures for the Management of Domestic Securities Investment by Qualified Foreign Institutional Investors at the end of 2002 marked the official introduction of China's QFII system. In 2003, Swiss Bank and Nomura Securities Co., Ltd. of Japan were approved by the CSRC(China Securities Regulatory Commission) and became the first batch of QFII investors in China. Since then, with the continuous opening up of China's capital market, the entry threshold for QFII has gradually lowered and investment restrictions have been continuously reduced. In 2013, the Provisional Measures for the Pilot Investment On Domestic Securities by Qualified Foreign Institutional Investors in RMB was promulgated, marking the introduction of the RQFII system in China. RQFII (RMB Qualified Foreign Institutional Investor) refers to overseas legal entities approved by regulatory authorities that use RMB funds from outside China to invest in domestic securities. The main difference between QFII and RQFII lies in the currency used for investment.

In 2020, the new regulation "Measures for the Management of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors" was promulgated, which made significant reforms to the QFII and RQFII systems in China. It unified the rules for QFII and RQFII, expanded investment varieties and scope, greatly simplified the application and approval process, and provided more convenience for overseas institutional investors to invest in China's capital market.

This article will introduce the current situation of China's QFII system from aspects such as application for access, investment rules, regulations on custodians, fund management, and taxation, providing reference for overseas investors.

01

Application for Access

(1) Approved entities

Foreign institutional investors who use funds from overseas to invest in China’s domestic securities and futures, including foreign fund management companies, commercial banks, insurance companies, securities companies, futures companies, trust companies, government investment institutions, sovereign funds, pension funds, charitable funds, endowment funds, international organizations, etc. that are recognized by China Securities Regulatory Commission (hereinafter referred to as the "CSRC").

(2) Access Conditions

The access conditions that the applicant should meet include:

1. Have a sound financial position, good creditworthiness, and experience in securities and futures investment;

2. The principal personnel responsible for investment business in China comply with the relevant professional qualification requirements of the country or region where the applicant is located (if any);

3. Have sound governance structure, internal control, and compliance management system, and appoint an inspector to supervise the legality and compliance of the applicant's investment behavior in China as required;

4. Have standardized business conduct, and have not received major penalties from regulatory authorities in the past three years or since its establishment;

5. Do not have circumstances that have a significant impact on the operation of China's capital market.

To prove that the applicant can meet the above conditions, the applicant should submit the following application documents through a domestic custodian to the CSRC:

A letter of application signed by the legal representative or their authorized representative (if the letter of application is signed by an authorized representative of the legal representative, a power of attorney issued by the legal representative to the authorized representative shall be provided);

Business license or registration certificate, and proof of business qualifications;

Explanation of whether the applicant has received major penalties from regulatory authorities in the past three years or since its establishment;

Power of attorney to the custodian;

Other documents required by the CSRC based on prudential supervision principles.

For international organizations, sovereign funds, and pension funds applying for QFII qualifications, they may be exempted from submitting documents 2 and 3 upon approval by the CSRC.

(3) Application Procedures

1. The qualified investor entrusts a domestic custodian in China (hereinafter referred to as the "custodian") to open an account, conduct foreign exchange settlement, and handle related procedures;

Note: If the qualified investor entrusts two or more domestic custodians in China, one custodian shall be designated as the primary reporter (if there is only one custodian, it shall be the default primary reporter), responsible for handling business registration and other matters on its behalf.

2. The qualified investor submits the application documents for QFII qualification to the CSRC through a domestic custodian in China;

3. The CSRC shall review the application materials within 10 working days from the date of acceptance of the application documents, and make a decision on approval or disapproval. If the decision is to approve, a written reply shall be issued, and a license for operating securities and futures business (hereinafter referred to as the "license") shall be issued; if the decision is not to approve, the applicant shall be notified in writing;

4. After obtaining the CSRC's license for operating securities and futures business, overseas qualified investors shall entrust the primary reporter to submit materials and apply to the State Administration of Foreign Exchange for business registration,by filling in the "Registration Form of Overseas Institutional Investors" and submitting a copy of the license for operating securities and futures business at the same time.

To be continued