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If you want access to the money markets in mainland China, you have to be a “Qualified Foreign Institutional Investor” or QFII first. QFIIs are defined as individual foreign investors licensed to trade in China’s mainland stock exchanges. Chinese authorities grant these licenses upon application by an interested party. It is important to note that securities traded in China are denominated in the Renminbi (RMB), so traders or investors must buy into the RMB currency to transact in the country’s markets.
QFII: How to qualify?
Chinese authorities set the criteria for who or what qualifies as a QFII. They can be asset managers, insurance and securities firms, commercial banks, endowment, sovereign wealth and pension funds, and even charities, for as long as they fit the bill.
The criteria set by Chinese authorities are:
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- The firm should have a team of qualified professionals with proven competence and financial security;
- The firm should be in good standing and has no record of disciplinary action as imposed by regulating bodies for at least the past three years;
- The firm should sign a memorandum of understanding with its securities regulator and the China Securities Regulatory Commission (CSRC); and
- The firm should have the minimum requirements set for assets managed and operating history.
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RMB: In the Spotlight
Since RMB is the currency of choice in China markets, it is essential to know more about this trading arsenal. Renminbi Yuan is also known as the Chinese Yuan (CNY). It was established by the People’s Bank of China (PBC) in December 1948, a time of civil war and economic instability in the country. The then Communist Party of China (CPC) resorted to forming the new currency to provide a less volatile alternative to the gold standard, which hedged against the hyperinflation and mismanagement that came with the political tension at the time.
The State Council then designated the PBC as mainland China’s central bank and cemented the CNY as the national currency in 1983, followed by its legal confirmation in 1995 by the National People’s Congress.
Why trade in China markets?
The short answer is, “why not?” China is one of the largest economies in the world. It ranks second in terms of GDP and first in terms of purchasing power parity among all countries. It has a robust and continuously expanding economy, being the world’s largest exporter. It has linked many major commercial activities to local economies through apparel, textile, and technology. And to maintain the economy at high value and low volatility, the capital outflow is limited and exchange rates are controlled. This may be the reason restrictions are in place to limit who gets to trade in mainland Chinese markets. Even after getting their QFII licenses, traders still contend with strict regulations to hedge against volatility.
What is the QFII program?
China established the QFII program in 2002 to allow non-Chinese investors to invest in Chinese assets and securities markets via special purpose accounts. These accounts are RMB-denominated, which means foreign investors will have to convert their currencies to RMB to start trading. The same goes for gains and dividends. Traders can convert these earnings to their local currency for repatriation, but they are still subject to regulations set by Chinese authorities.
Even after getting a QFII license, a foreign investor still undergoes strict monitoring. This means that Chinese authorities control the accounts, quota, products, and fund conversions involving non-Chinese investors’ transactions. Later on, China expanded its QFII program to include RMB funds in offshore accounts in Hong Kong.
What is the RQFII program?
The Renminbi Qualified Foreign Institutional Investor (RQFII) program was created in 2011 as a way to include offshore funds primarily raised by subsidiaries of domestic funds or securities companies based in Hong Kong to invest in the domestic securities market in the mainland. Chinese authorities also impose restrictions on RQFIIs. Investors under the RQFII program cannot trade all types of asset classes, but only those that the regulators allow. This is how authorities hedge against possible volatility in their stocks.
The main difference between QFII and RQFII as programs is that QFII uses the foreign trader’s home currency before converting it to RMB internally, while RQFII uses offshore RMB accounts from company subsidiaries in Hong Kong. Around 279 foreign institutions are licensed under this program.
However, when it comes to trading in China markets, the sky is not the limit. The Chinese Administration of Foreign Exchange sets the investment quotas to QFIIs under both programs. It was initially set at $10 billion and was increased gradually to reach $80 billion in 2018.
The China market
Strict regulations and restrictions notwithstanding, China is still a profitable market for investors and traders. Just look at the number of firms that still seek licenses under the QFII program to trade in its markets despite strict regulations. But strict as they are, these “safety nets” against volatility are also the reasons that make China markets very attractive, because it is more likely to turn a profit for the investor rather than suffer a loss.
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