The PRC-qualified domestic institutional investor scheme had a slow start since its inception in 2006, but recent changes and relaxations to the scheme may change this, as they facilitate greater investment in offshore funds and other investments.
The potential of the PRC’s outward investment potential is considerable: in June 2007 the National Bureau of Statistics in
More choice for PRC investors in offshore markets
Discussions concerning a relaxation of the currency convertibility and capital accounts restrictions date back to 2001 when the PRC became a member of the World Trade Organisation. In the years following 2001, the pressure on the PRC to act gathered momentum amid rising foreign reserves and international concerns, particularly in the
In April 2006, the People’s Bank of China,
However, in the first year of its operation, the QDII scheme proved relatively unpopular with PRC investors due to the low returns from the mostly fixed-income QDII products compared to investing in PRC equities.
With a view to increasing the attractiveness of the QDII scheme to PRC investors, the PRC authorities widened the scope of the scheme in May 2007 by giving qualified commercial banks more choices to invest in offshore markets. Since then, restrictions have been further relaxed for qualified securities institutions and insurance companies.
Regulation maze
The QDII scheme enables PRC nationals to invest in overseas markets through qualified domestic institutional investors (such as commercial banks, securities institutions (which include fund management companies and securities companies) and insurance companies), within the limits of the scheme.
In addition to the QDII scheme, a similar scheme is operated by the National Social Security Funds (NSS Funds). Both the QDII and the NSS Funds are subject to regulatory control by a number of governmental regulators, although rules made by the various bodies may vary in terms of permitted investment activities and financial products, and there is no ‘standard approach’ taken by all regulators.
Relaxation for commercial banks
As mentioned, initial take-up of QDII products by PRC investors was limited. From commencement to May 2007 it is believed that only 3% of the $15bn (£7.5bn) worth of quotas had been used — despite the increase of foreign currency conversion quota per PRC individual announced by the State Administration of Foreign Exchange (SAFE) in January 2007, from $20,000 (£9,975) to $50,000 (£24,940) per annum.
Accordingly, the China Banking Regulatory Commission (CBRC) issued the Notice of the Adjustments to the Offshore Investment Scope of Overseas Wealth Management Business of Commercial Banks on Behalf of Their Clients (Notice), to widen the scope of the QDII scheme.
The notice has removed the prohibition on investments in offshore equities by qualified commercial banks and allows them to invest up to 50% of the total net asset value of QDII funds in offshore equity markets. However, a number of restrictions continue to apply to relevant fund vehicles through which overseas investments may be made, and hedge funds are included in the list of products in which investments may not be made.
The CBRC is currently drawing up a regulatory framework for the PRC’s private banking industry and it is believed that such regulatory framework will set out mandatory qualifications for wealth managers and include clear risk management requirements to protect PRC investors. However, this is not expected to be released until at least the end of 2007.
Rules for Securities institutions
Following on from the relaxation of the QDII scheme rules for qualified commercial banks in May 2007, the Tentative Procedures for the Administration of Overseas Securities Investments by Qualified Domestic Institutional Investors (Tentative Procedures) and the Circular Concerning the Implementation of the Tentative Procedures (Implementing Circular) were issued by the China Securities Regulatory Commission (CSRC) on 20 June, 2007.
The Tentative Procedures elaborate on the qualifying criteria for securities institutions seeking QDII qualification. They also specify additional qualification criteria applicable to fund management companies and securities companies.
The Implementing Circular permits qualified securities institutions to invest in publicly-raised offshore mutual funds that have been registered with their national securities regulatory authority, provided the regulatory authority has signed a memorandum of understanding (MOU) for co-operative regulation with the CSRC. By the end of May 2007, 33 regulatory authorities had signed an MOU with the CSRC.
However, despite this the Implementing Circular currently has limited impact as neither the Cayman Islands nor the
The Implementing Circular does not clarify whether the funds in which qualified securities institutions may invest need to be open-ended or closed-end. However it is understood that the CSRC makes no distinction between open-ended and closed-ended funds for the purpose of the Tentative Procedures and the Implementing Circular and, in consequence, it appears that qualified securities institutions can invest in both closed-end and open-ended funds.
By contrast, the Implementing Circular does not specifically prohibit qualified securities institutions from investing in hedge funds, but it is understood that the CSRC does not consider that investments in hedge funds by qualified securities institutions are permitted.
In addition to the above relaxations to the QDII scheme rules for qualified commercial banks and qualified securities institutions, the CIRC issued the Interim Administrative Measures for Overseas Investment of Insurance Funds in July 2007. These expand the range of products into which qualified insurance companies may invest to include shares and options (in addition to fixed income and money market products). Implementing rules, which will clarify the scope of the changes are, as yet, unpublished.
Impact on international financial markets
The recent widening of the scope of the QDII scheme in relation to qualified commercial banks, qualified securities institutions and qualified insurance companies illustrates the PRC Government’s desire to ensure that the QDII scheme is successful.
This increasing liberalisation of the PRC’s capital markets represents a further step in the integration of the PRC into the global financial system, and the impact of the relaxation of the QDII scheme rules is expected to be significant.
Changes in the laws and regulations for Chinese outbound investments are expected to continue in the coming months, and more financial products may be added to the permissive list for qualified PRC investors to make overseas investment through PRC-qualified institutions.
Indeed, the ‘stop press’ nature of the current pace of change in this area is further illustrated by an announcement made by SAFE as this article goes to print. On 20 August, SAFE announced a pilot scheme which would allow PRC individuals to open foreign exchange accounts at the Bank of China’s
Jane Newman is resident partner at Simmons & Simmons in
