China Issues New Rule to Govern Foreign Investors

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Last updated at: (Beijing Time) Friday, November 29, 2002

China Issues New Rule to Govern Foreign Investors

The Chinese authorities Thursday released a detailed regulation on foreign exchange issues related to the Qualified Foreign Institutional Investors (QFII) scheme.

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The Chinese authorities Thursday released a detailed regulation on foreign exchange issues related to the Qualified Foreign Institutional Investors (QFII) scheme.

The rule, designed by the State Administration of Foreign Exchange (SAFE), came out two days before the formal launch of the experimental scheme that will open up the domestic A-share and bond markets to foreign institutional investors.

It clarified foreign exchange management systems for the account and quota used for QFII investment, as well as remittance of capital, liabilities of the custodians and the supervisory role of the government. The regulation is a supplement to a circular issued three weeks ago that gave the go-ahead to the QFII programme and set up the initial framework.

Under the new rule, each qualified foreign investor can only open one special renminbi account to facilitate securities trading in China. The investor can apply for an investment quota that equals something between US$50 million and US$800 million.

"The range is appropriate,'' said Kai Yang, chief representative in Beijing of UBS Warburg Asia Ltd, which plans to apply for a QFII licence to invest in China.

That caters to the demand from different investor groups, he said. And the quota could be widened in the future because the QFII is not a fixed scheme and will be adjusted later on.

A transitional mode in the opening-up of the securities market before renminbi becomes freely convertible, China's QFII programme is based on the experience of other countries and regions, including the Republic of Korea and China's Taiwan Province.

Risk control is crucial to the programme, so the Chinese Government has to work out a detailed scheme to avoid the inflow of international hot money that would hurt the financial soundness of the country, a SAFE spokesperson said.

Medium and long-term foreign investment is encouraged and the government will closely monitor the capital flow, the spokesperson said.

Presently, if the daily inward remittance to an account reaches US$50 million, it must be reported to SAFE.

In addition, the plan calls for every licenced investor to undergo an examination each April of their qualifications and operations.

As for the custodians, where the special accounts for QFII will be opened, they must submit to SAFE reports of their forex business for the previous three years.

Formal agreements must be signed between the custodian banks and foreign investors. And the custodians shoulder liabilities if they do not regularly report to the authorities as required.

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