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China’s Renminbi qualified foreign institutional investors (RQFII) Pilot Scheme expanded

10 May 2013

The pilot scheme for RQFII was first introduced in China in December 2011, aiming to enable China's financial industry to channel overseas RMB funds into the domestic market through various RMB denominated products launched in Hong Kong (such as bond-type funds and ETFs) in furtherance of the promotion of RMB internationalisation.

In March 2013, the China Securities Regulatory Commission (CSRC) revised its RQFII rules to expand the pilot scheme in response to the continued expansion of the offshore RMB markets and an increasing demand for repatriation of offshore RMB back to the onshore securities market.

The RQFII pilot scheme was originally limited to Hong Kong subsidiaries of PRC incorporated fund management companies and securities companies which have obtained a type 9 licence from the Hong Kong regulator. As a result of the recent expansion, Hong Kong subsidiaries of PRC incorporated commercial banks or insurance companies and other financial institutions which are registered and domiciled in Hong Kong (without a PRC background), if they are a type 9 licence holder, can also apply for a RQFII licence from CSRC. RQFIIs may invest in a broad range of RMB equity and debt instruments traded on a Mainland stock exchange or the National Interbank Bond Market and can trade stock index futures to hedge its holding of A shares.

Notably, the expanded pilot scheme has removed the previous restriction on debt/equity investment ratio. Therefore, the investment portfolio of a RQFII is no longer subject to the 20% cap on equity instruments (ie with the minimum holding of fixed income instruments to be 80%).

In addition to the RQFII pilot scheme (which focuses on financial investments in securities markets), offshore investors have been allowed to lend in RMB to PRC borrowers or make an equity injection in RMB into PRC incorporated companies under the existing foreign debt regime and the foreign direct investment regime.

As the next step, it is expected that the Pilot Scheme may be further expanded to also include international banks or asset managers (with or without a PRC or Hong Kong nexus) although the PRC regulators have not published any official timeline for such expansion.