​Over the last few years, the liberalization of China’s capital market has rapidly expanded, and diversified cross-border business has been introduced to the market and refined for sophistication. Such developments have facilitated Chinese investors to configure their overseas assets more conveniently, and at the same time, allowed overseas investors to enter China’s market in a more efficient manner. This article analyzes six major facets of the development of cross-border business in China’s capital market .

I． Qualified Domestic Institutional Investors (“QDII”) Scheme

On 18 June 2007, the China Securities Regulatory Commission (“CSRC”) issued the Pilot Measures on the Administration of Overseas Securities Investment by Qualified Domestic Institutional Investors. The QDII scheme was then officially put into force. On 14 March 2013, CSRC issued the Notice regarding Consultation for the Amendment of the Pilot Measures on the Administration of Overseas Securities Investment by Qualified Domestic Institutional Investors and the Relevant Supplementary Rules. The consultation papers lowered the standard of qualification requirements for the entry into QDII business, cancelled requirements with respect to the size of assets under management and years of operation, and expanded the allowable investment scope.

At the press conference held by the State Administration of Foreign Exchange (“SAFE”) in September 2016, SAFE explicitly indicated that the overall QDII quota, amounting to USD90 billion, had all been granted and allocated to QDIIs, and no additional QDII quota would be granted for the time being.

II． Qualified Domestic Limited Partnership (“QDLP”) Scheme

On 19 April 2012, the Shanghai Municipal Financial Service Office, the Shanghai Municipal Commission of Commerce and the Shanghai Administration for Industry and Commerce jointly issued the Implementing Measures regarding Shanghai Pilot Channel for the Commencement of Qualified Domestic Limited Partnership. The Shanghai QDLP policies were then officially launched.

According to the relevant policies of the QDLP scheme, a qualified overseas asset management institution may set up a foreign-invested enterprise in Shanghai and apply for a QDLP license. After registration with the Asset Management Association of China, it may raise and manage private fund(s) to invest in offshore markets (“QDLP Fund”). The size of the assets under management of a QDLP Fund shall be no less than RMB100 million, and the QDLP Fund may utilize the capital raised to invest in overseas funds or securities traded on the secondary market within its approved quota. Since 2013, thirteen institutions have obtained a QDLP license and quota. The first group of institutions were hedge fund managers (such as Man and Winton), while the second and the third groups were expanded to include traditional large asset management institutions (such as UBS and BlackRock).

III． Stock Connect Programme

1. Shanghai-Hong Kong Stock Connect

On 10 April 2014, CSRC and the Securities and Futures Commission of Hong Kong (“SFC”) jointly issued the Joint Announcement regarding the Development of the Pilot Programme of Shanghai-Hong Kong Stock Connect, and accordingly commenced the Pilot Programme of Shanghai-Hong Kong Stock Connect. The Shanghai Stock Exchange and the Stock Exchange of Hong Kong Limited allow investors from Mainland China or Hong Kong to trade eligible shares listed on the other’s market through local securities brokers. The Shanghai-Hong Kong Stock Connect provides a convenient, flexible, stable and scalable channel for investors from the Mainland or Hong Kong markets to directly enter into the other’s market. On 17 November 2014, transactions on the Shanghai-Hong Kong Stock Connect officially commenced.

2. Shenzhen-Hong Kong Stock Connect

On 16 August 2016, CSRC and SFC jointly issued the Joint Announcement on Shenzhen-Hong Kong Stock Connect, approving the establishment of the Shenzhen-Hong Kong Stock Connect and officially launching the preparation work therefor. The establishment of the Shenzhen-Hong Kong Stock Connect will further expand the scope of Mainland-Hong Kong mutual stock market access. At the present stage, the comparison between the scope of Southbound Trading Link under Shenzhen-Hong Kong Stock Connect and Shanghai-Hong Kong Stock Connect shows that the investment objectives are broader for the new Hang Seng Composite Smallcap Index constituents with market capitalization of HKD5 billion or above. Furthermore, it is stated that exchange-traded funds (ETFs) will be included as eligible securities under the mutual stock market access in the future.

3. New Developments concerning the Mutual Stock Market Access

The Joint Announcement on Shenzhen-Hong Kong Stock Connect states that there shall be no more limitations on the aggregate quota for the Shenzhen-Hong Kong Stock Connect and the Shanghai-Hong Kong Stock Connect. However both are still subject to restrictions on the daily quota. The daily quota for the Southbound Trading Link of Shenzhen-Hong Kong Stock Connect and Shanghai-Hong Kong Stock Connect are separately controlled by the Shenzhen Stock Exchange and the Shanghai Stock Exchange (i.e. the daily quota for each stock connect is RMB10.5 billion); the two are not mutually affected and no adjustments will be made with reference to the other. 

Presently, the governmental authorities in China and the UK have, according to the policy outcomes of the Seventh China-UK Economic and Financial Dialogue, already commenced feasibility studies on launching a stock connect and have begun exploring the mode of cooperation between the two countries in a proposed Shanghai-London Stock Connect. Such developments will strengthen the mutually beneficial cooperation between the capital markets of the two countries in the future and will further promote a more thorough liberalization of China’s capital market.

IV． Mutual Recognition of Funds (“MRF”)

On 22 May 2015, CSRC and SFC made a joint announcement, in which Mainland and Hong Kong funds (funds of the Home Jurisdiction) that satisfy certain requirements are allowed to obtain authorization or approval, according to relevant procedures, to be offered publicly in the other’s market (the market of the Host Jurisdiction). According to the joint announcement, the initial investment quota for the mutual fund recognition scheme is RMB300 billion for capital flow of each direction.

1. Northbound Funds

Hong Kong domiciled funds must satisfy the requirements stipulated in Article 4 of the Interim Provisions on the Administration of Recognized Hong Kong Funds in order to apply for registration with CSRC and be publicly offered in the Mainland. As of 31 July 2016, eighteen Hong Kong funds had applied to CSRC for recognition, and among those, six had obtained approval. According to the statistics of capital inflow and outflow for recognized Hong Kong funds released by SAFE, as of 31 July 2016, the amount of aggregated net outflow for recognized Hong Kong funds is RMB3.876 billion.

2. Southbound Funds

Mainland funds that apply for authorization from SFC must satisfy the requirements listed in the Circular regarding Mutual Recognition of Funds between the Mainland and Hong Kong. According to the data published in the media, to date, forty-five Mainland funds have obtained authorization from SFC to be offered publicly in Hong Kong, and among those, twenty-four funds are already being sold in Hong Kong. According to the statistics of capital inflow and outflow for recognized Mainland funds released by SAFE, as of 31 July 2016, the amount of aggregated net inflow for recognized Mainland funds is RMB66.3451 million.

The MRF is another milestone for the reciprocal opening-up of the Mainland and Hong Kong capital markets, as it provides more varieties of fund investment products to investors from both markets. It was also recommended in the policy outcomes of the Seventh China-UK Economic and Financial Dialogue that a working group on mutual fund recognition between China and the UK is welcomed to be established, and the two countries have agreed to further promote investments and capital flow between the two markets.

V． Qualified Foreign Institutional Investors (“QFII”) and Renminbi Qualified Foreign Institutional Investors (“RQFII”) Schemes

1. QFII Scheme

The pilot programme for the QFII scheme was launched in 2002. In 2006, CSRC issued the amended Measures for Domestic Securities Investment by Qualified Foreign Institutional Investors, and in 2012 the regulations on QFII were amended, the approval procedures were simplified, and the standard of QFII qualification requirements was lowered, among other things. For example, the requirements that “an asset management institution shall have operated asset management business for five years or more, and the asset size under its management in the preceding accounting year shall be no less than USD5 billion” were lowered to “an asset management institution shall have operated asset management business for two years or more, and the asset size under its management in the preceding accounting year shall be no less than USD500 million”.

On 3 February 2016, SAFE issued the Rules on Foreign Exchange Administration of Domestic Securities Investment by Qualified Foreign Institutional Investors (SAFE Announcement 2016 No. 1) (“Rules on QFII Foreign Exchange”). The significant reforms in the administration of QFII foreign exchange include, without limitation, the following:

A. Introducing the “Base Quota” Mechanism and Simplifying the Administration on Approval for Investment Quota

According to the Rules on QFII Foreign Exchange, the base quota of the QFII is relative to its asset size, and the base quota shall be calculated with reference to the QFII’s scale of assets or the size of securities assets under its management. A QFII may obtain an investment quota within its base quota through filing with SAFE prior to the investment (the QFII might file fractionally as necessary), while prior approval by SAFE is needed for an application for an investment quota that exceeds the base quota.

B. Quota Management by the Balance of Investment Quota

Quota management by the balance of investment quota merely requires that the aggregated net asset value of inward remittance on capital of the QFII shall not exceed its investment quota obtained by way of filing or approval. It no longer distinguishes different types of quotas. The investment quota is given to the respective QFII for its flexible allocation among its own capital, open-ended funds and client money, and the QFII does not have to make a prior application or filing with SAFE for such allocation or adjustment.

C. Shortening the Lock-up Period

The Rules on QFII Foreign Exchange eliminated the distinction between the lock-up period of different kinds of capital, and consolidated the “principal lock-up period” of all kinds of QFII capital to three months, starting from the date on which the cumulative inward remittance of investment principal by the QFII reaches a total of USD20 million.

D. Removing the Requirement that the QFII Shall Remit Investment Principal within Six Months

E. Facilitating Remittance and Repatriation

The Rules on QFII Foreign Exchange allow an open-ended fund to conduct inward and outward remittance procedures on a daily basis. At the same time, approval by SAFE for the outward remittance of the principal of QFIIs is no longer needed. A QFII may directly conduct outward remittance of the principal and profits through its PRC custodian. However, the accumulated net repatriation of the capital remitted outward (principal and profits) of the QFII each month shall not exceed 20% of the amount of its total assets within the PRC at the end of the preceding year. Meanwhile, an open-ended fund shall also satisfy the requirement that the accumulated net repatriation of the capital remitted outward shall not exceed 20% of the amount of the total assets of the fund within the PRC at the end of the preceding year. 

2. RQFII Scheme

In December 2011, CSRC issued the Pilot Measures for Domestic Securities Investment by Fund Management Companies, Securities Companies Renminbi Qualified Foreign Institutional Investors and relevant notice, and then put into force the RQFII scheme. In March 2013, the regulations on RQFII were amended, the categories of pilot institutions were expanded, and the restrictions on the investment scope and investment ratio were relaxed.

On 5 September 2016, the People’s Bank of China (“PBoC”) and SAFE jointly issued the Notice on Issues Relevant to Administration of Domestic Securities Investment by Renminbi Qualified Foreign Institutional Investors (Yinfa [2016] No.227), in which reforms to the administrative system of RQFII, similar to that of QFII, were put forward. The concepts of “base quota” and consolidated quota management by the balance of investment quota were introduced to the RQFIIs. No restrictions on the inward remittance period of investment principal and the lock-up period of investment principal have been established for RQFII open-ended funds; the reforms have removed restrictions on the inward remittance period of investment principal for other products (or capital), and shortened the lock-up period of investment principal for other products (or capital) from one year to three months, starting from the date on which the accumulated investment principal remitted inward reaches RMB100 million.

VI． Overseas Institutional Investors (“OIIs”) Participating in the China Inter-bank Market

According to The People’s Bank of China Announcement (2016) No.3 (“Announcement”) published on 24 February 2016 and the set of supporting rules issued on 27 May 2016, the PBoC aims to introduce more eligible “medium and long-term” OIIs to invest in the China Inter-Bank Bond Market (“CIBM”) by permitting access through prior filling, removing investment quota restrictions and simplifying regulatory procedures, among other things.

The Announcement and its supporting rules promote the liberalization of CIBM in three key aspects, namely, the expansion of the scope of OIIs, the use of a filing system for entry into CIBM, and the removal of restrictions on the investment quota. The widened scope of OIIs includes commercial banks, insurance companies, securities companies, fund management companies, and other asset management institutions, which are registered and incorporated outside Mainland China, the investment products that the aforementioned financial institutions launch, and other “medium and long-term” institutional investors recognized by the PBoC, such as pension funds, charitable funds, and donation funds.

Furthermore, the National Inter-bank Funding Center amended the Rules on Issuing and Trading Inter-bank Certificate of Deposit in the Inter-bank Market on 21 June 2016, adding “overseas financial institutions and other institutions recognized by the PBoC” into the scope of eligible investors, which means that the aforesaid OIIs are all allowed to invest in inter-bank certificates of deposit.