2020.05.13 XIE, Qing (Natasha)、QIN, Tianyu
On May 7, 2020 the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly issued the Administrative Provisions on Domestic Securities and Futures Investment Capital of Foreign Institutional Investors (PBOC & SAFE Circular  No. 2) (“Administrative Provisions”) to clarify and simplify the management requirements for domestic securities and futures investment capital of foreign institutional investors, thereby further facilitating foreign institutional investors’ participation in China’s financial market. On the same day, the PBOC official website published the FAQ No. 1 on Administrative Provisions on Domestic Securities and Futures Investment Capital of Foreign Institutional Investors (“FAQ No.1”) to answer some questions related to the implementation of the Administrative Provisions. The official implementation of the Administrative Provisions on June 6, 2020 is meant to carry out the decision announced by SAFE on September 10, 2019, namely, to remove the investment quota restrictions on Qualified Foreign Institutional Investors (QFIIs) and RMB Qualified Foreign Institutional Investors (RQFIIs) (collectively, “Qualified Investors”) by implementing a registration-based management system for cross-border capital inward remittances and exchanges by Qualified Investors.
Below we briefly summarize some key provisions of the Administrative Provisions, as well as highlight the differences between the Administrative Provisions and the consultation Paper released on December 13, 2019 (“Consultation Paper”).
1. The Administrative Provisions explicitly allows Qualified Investors to choose the currency and timing of capital inward remittances.
2. The Administrative Provisions stipulates that a custodian may handle the capital repatriation process for a Qualified Investor with written application or instructions as well as a commitment letter issued by the Qualified Investor provided that the Qualified Investor has fully paid relevant taxes in accordance with applicable tax laws and regulations in China. In the FAQ No. 1, the PBOC and SAFE further specify the elements of the aforesaid commitment letter and the relevant procedures for handling capital repatriation when a custodian receives a commitment letter.
3. In the Consultation Paper, it is emphasized that the inward remittance and repatriation made by a Qualified Investor for its domestic securities investments shall be in the same currency and no cross-currency arbitrage shall be allowed. The Administrative Provisions further clarifies that the prohibition on cross-currency arbitrage is to prevent the cross-currency arbitrage between RMB and foreign currencies and Qualified Investors are allowed to convert between different foreign currencies according to their actual needs.
1. The Administrative Provisions limits the trading of derivatives by Qualified Investors to trading of foreign exchange (forex) derivatives and trading of financial derivatives in accordance with certain provisions, both for purpose of hedging, which is in line with the Provisions on Issues Concerning the Implementation of the Administrative Measures on Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (Consultation Paper).
2. The Consultation Paper preserves the requirement that trading forex derivatives shall be based on genuine needs, but strikes the requirement that forex derivative positions shall be adjusted on a monthly basis in accordance with the scale of RMB assets corresponding to the domestic securities investments as calculated by the custodian. In the FAQ No. 1, the PBOC and SAFE reiterate the aforementioned requirement to adjust forex derivative positions on a monthly basis, specifying that Qualified Investors shall, within five working days at the beginning of each calendar month, adjust their forex derivative positions in accordance with the scale of RMB assets, corresponding to the domestic securities investments in the preceding month, so as to ensure compliance with the principle of genuine needs.
The FAQ No. 1 further provide that a Qualified Investor is obliged to inform the main reporter of its forex derivative positions or total positions in different trading counterparties. The main reporter shall supervise the qualified investor’s overall domestic derivative positions to ensure its compliance with the principle of genuine needs.
The Administrative Provisions remove the limitation on the number of custodians and allow each Qualified Investor to entrust multiple domestic custodians, while simultaneously implementing a main reporter system, the implementing measures on which are further stipulated in the FAQ No. 1.
In contrast to the Consultation Paper, the Administrative Provisions specifies that Qualified Investors shall entrust their custodians to complete relevant reporting formalities or submit relevant applications to the PBOC and SAFE. The Administrative Provisions further require Qualified Investors to cooperate with their custodians in fulfilling obligations regarding review of authenticity and compliance, anti-money laundering, anti-terrorist financing, etc.
Notably, with respect to the suggestions made by some foreign institutions on the Consultation Paper, such as reforming the account management system for Qualified Investors in reference to the account management system for foreign investors directly investing in the interbank bond market (“CIBM Direct”) and gradually unifying the hedging-based trading mode for forex derivatives by both Qualified Investors and foreign investors gaining access through CIBM Direct, the PBOC and SAFE have not yet adopted such suggestions in consideration of the significant difference between the investment scope for Qualified Investors and that for CIBM Direct, and the difficulty with reforming the entire process related to capital accounts if adopting the suggestions. However, the PBOC and SAFE mentioned that they would steadily seek relevant reforms in the future as appropriate.
Additionally, with the issuance of the Administrative Provisions, we also expect the long-awaited QFII/RQFII new regulations will be officially released soon.
We will continue to monitor the situation and keep our clients apprised of any important developments.