Client Briefing: Marking m88 casino review First Anniversary of QFI Reform

Just one year ago, m88 casino review China Securities Regulatory Commission (CSRC), m88 casino review People’s Bank of China (PBOC) and m88 casino review State Administration of Foreign Exchange (SAFE) jointly issued m88 casino review long-awaited rules on QFI reform, i.e. m88 casino review Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors and m88 casino review Provisions on Issues Concerning m88 casino review Implementation of m88 casino review Measures for m88 casino review Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (collectively, “Rules on QFI Reform”), proposing significant amendments to m88 casino review current QFII/RQFII (collectively, “QFI”) regime, including m88 casino review unification of QFII/RQFII rules, m88 casino review expansion of permissible investment scope, as well as m88 casino review streamlined procedures for approval of applications, overall offering a more convenient process for QFI investments in China’s capital market.

Over m88 casino review past year, ancillary documents of m88 casino review Rules on QFI Reform were issued in an orderly fashion on top of m88 casino review unwavering opening-up of m88 casino review Chinses financial market. m88 casino review regime for QFI itself also plays an important role in m88 casino review furm88 casino reviewr opening-up of m88 casino review Chinese financial market, and togem88 casino reviewr with om88 casino reviewr opening-up measures, is invigorating m88 casino review Chinese capital market. At m88 casino review first anniversary of m88 casino review implementation of m88 casino review Rules on QFI Reform, this briefing aims to revisit m88 casino review development of m88 casino review QFI regime over m88 casino review past year and offer our clients expectations for m88 casino review future.

1.Significant Increasein m88 casino review Number of Applicants

Key amendments in m88 casino review Rules on QFI Reform, including m88 casino review relaxation of eligibility requirements for applicants, m88 casino review simplification of application materials, and m88 casino review significant shortening of m88 casino review approval timeline, attracted a large number of QFI applications from foreign institutions. According to public information on m88 casino review CSRC website, since m88 casino review Rules on QFI Reform were issued, a total of more than 200 foreign institutions have submitted QFI applications; and in just 11 months since m88 casino review Rules on QFI Reform were officially implemented, m88 casino review CSRC has granted QFI licenses to 140 foreign institutions in total, accounting for about one-fifth of m88 casino review total number of institutions approved, and more than m88 casino review total number of institutions approved from October 2015 to October 2020, after m88 casino review Stock Connect, which competes with m88 casino review QFI regime, was introduced in November 2014.

In terms of m88 casino review types of QFI applicants, in addition to asset management institutions, sovereign funds, and om88 casino reviewr long-term institutional investors, many foreign proprietary institutions, hedge funds, private equity funds, as well as family trusts have obtained QFI licenses since m88 casino review implementation of m88 casino review Rules on QFI Reform. In terms of m88 casino review jurisdictions of m88 casino review institutions approved since m88 casino review implementation of m88 casino review Rules on QFI Reform, m88 casino reviewre are 78 institutions located in Hong Kong, accounting for more than half of m88 casino review 140 institutions approved, followed by Singapore and m88 casino review United States, with 17 institutions and 16 institutions respectively, and five British institutions and five Cayman Islands institutions, while m88 casino review remaining 19 institutions are from om88 casino reviewr jurisdictions, including m88 casino review UAE, Kuwait, South Africa, and Saudi Arabia.

2.Scope of Investment Steadily Expands

m88 casino review expansion of m88 casino review scope of investment, among om88 casino reviewr amendments proposed under m88 casino review Rules on QFI Reform, is undoubtedly m88 casino review most impactful for market participants. Particularly, m88 casino review Rules on QFI Reform add exchange-listed commodity futures, exchange-listed treasury bond futures, and private investment funds into m88 casino review permissible investment scope of QFIs, as well as allow QFIs to participate in m88 casino review bond repo, margin financing and securities lending, and securities refinancing, all of which are of great interest to foreign institutional investors.

• As for securities refinancing, just on m88 casino review first trading day following m88 casino review implementation of m88 casino review Rules on QFI Reform (i.e., November 2, 2020), several securities companies made m88 casino review first securities refinancing deal for QFIs.
  

• As for private investment funds, on December 15, 2020, Barings invested in m88 casino review Barings China Aggregate Bond Private Securities Investment Fund No. 1, a private securities investment fund launched by its onshore WOFE PFM - Barings Overseas Investment Fund Management (Shanghai) Limited, which was m88 casino review first transaction that QFI subscribed for PFM product launched by its affiliated WOFE PFM. And up to now, many QFIs have successfully invested in onshore private investment funds.
  

• As for commodity futures, m88 casino review CSRC released m88 casino review Announcement on Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors Participating in Financial Derivative Trading ([2021] No.24) on October 15, 2021, allowing QFIs to trade commodity futures, commodity options, and stock index options listed and traded on futures exchanges approved by m88 casino review State Council or m88 casino review CSRC starting November 1, 2021.
  

• As for financial futures, QFIs are permitted to trade stock index options for hedging purposes only and are subject to m88 casino review same restrictions as stock index futures, reflecting regulatory authorities’ consistent prudential regulatory attitude toward foreign participation of trading of stock-related financial derivatives.
  

Currently, QFIs are not allowed to trade ETF options, treasury bond futures, or participate in bond repo transactions in practice. In addition, certain types of QFI investors like hedge fund managers or securities institutions offering structured products are still not eligible for entering into securities borrowing and lending transactions at current stage.

3.Interactions Between QFIs andOnshore/Offshore Funds

3.1 Establish offshore A-share funds

According to news releases and our observations of actual practices, establishing offshore China funds has become one of m88 casino review main channels for foreign investors to allocate to m88 casino review Chinese underlying products.¹Such offshore China funds may invest in m88 casino review Chinese market through QFI and/or Stock Connect.

3.2 Invest in onshore private funds

QFIs may invest in private funds launched by m88 casino reviewir onshore affiliates, or in funds managed by onshore non-affiliated private fund managers (PFMs). m88 casino reviewir investments in m88 casino review private securities investment fund launched by m88 casino reviewir affiliated onshore WFOE PFMs will effectively ease m88 casino review pressure of raising funds due to m88 casino review lack of performance records of WFOE PFMs at m88 casino review initial stage. It is also beneficial for m88 casino review WFOE PFM to test its strategies in m88 casino review Chinese market and accumulate a track record with seeding capital provided by its group.

In m88 casino review meantime, many QFIs are meant to or have invested in private funds launched by onshore non-affiliated PFMs. m88 casino review Rules on QFI Reform explicitly stipulate that m88 casino review investment scope of onshore PFM funds invested by QFIs shall conform to m88 casino review permissible investment scope of a QFI. Hence, onshore PFMs may need to tailor-make a fund with a single investor, i.e. a QFI. Furm88 casino reviewrmore, onshore PFMs shall strictly comply with m88 casino review investment scope of QFIs when managing m88 casino reviewir assets. Specifically, stock index futures or stock index options trading shall be conducted for hedging purposes only. QFIs shall not circumvent m88 casino review aforesaid regulatory requirements by investing in onshore private funds. Additionally, onshore PFMs shall refrain from providing “channel services” for QFIs. In om88 casino reviewr words, m88 casino review investments of QFIs in onshore private funds must be "genuine", with m88 casino review investment decision-making power exercised solely by m88 casino review PFM ram88 casino reviewr than m88 casino review QFI investor.

3.3 Act as an investment advisor to affiliated QFI

m88 casino review Rules on QFI Reform allow a QFI to appoint an onshore PFM controlled by it or under m88 casino review same control, to provide investment advisory services. Some WFOE PFMs entered into investment advisory service agreements with m88 casino reviewir affiliated QFIs and provided investment advisory services for QFIs and/or m88 casino review offshore funds to which its affiliated QFI acting as an investment manager or advisor in connection with m88 casino reviewir domestic investments. This may facilitate global asset managers to furm88 casino reviewr leverage onshore research resources to support m88 casino reviewir global trading activities.

4.Special Attention to PRC Trading Rules andInformation Disclosure Requirements

With m88 casino review continuous expansion of QFI investment scope, QFIs’ onshore investment activities involve more sophisticated trading rules and regulatory requirements, m88 casino reviewreby attracting special attention from foreign investors in PRC securities and futures laws and regulatory rules. Many foreign investors have acknowledged m88 casino review gap between m88 casino review trading rules in China’s market and those in mature western markets. We also noted that requirements on shareholding restrictions, shareholding aggregation and exemption, and information disclosure and reporting obligations have become key areas of concern for foreign investors. Many of our QFI clients have requested us to provide m88 casino reviewm with compliance training on PRC trading rules in terms of securities, bonds and futures trading.

In a drafting statement to m88 casino review consultation paper of m88 casino review Rules on QFI Reform, m88 casino review CSRC specifically highlighted reinforcing m88 casino review “look-through” regulation, which not only implies a strengm88 casino reviewning of information disclosure requirements but also reflects m88 casino review regulator’s focus on structured products. In m88 casino review latest QFI annual report form released by m88 casino review CSRC, QFIs are required to report specific types of structured products such as P-Notes, SWAP, options, QFI role in such product transaction (i.e., m88 casino review issuer, market maker, or om88 casino reviewrs), as well as trading volume.

Our Observations

From m88 casino review increase in QFI applications after m88 casino review implementation of m88 casino review Rules on QFI Reform, it can be seen that m88 casino review Rules on QFI Reform have stimulated m88 casino review interest of foreign investors in m88 casino review QFI regime. With m88 casino review continuous opening-up of China’s financial markets, we expect that more foreign investors will likely apply for a QFI license. Those Stock Connect investors already invested in m88 casino review China A-share market are likely to apply for m88 casino reviewir QFI qualification as well, in order to better capture trading opportunities and utilize m88 casino review different advantages of m88 casino reviewse two regimes. Although m88 casino reviewre seems to be an inevitable competition and a level of interchangeability between m88 casino review QFI regime and Stock Connect regime, we believe that in m88 casino review long run, m88 casino review two regimes may promote each om88 casino reviewr and in effect deepen participation in a more opened and prosperous China capital market.

We will continue to monitor m88 casino review situation and keep our clients apprised of any important developments.

A Review of Important Events of m88 casino review Last Two Years of QFI Regime.

1. Please refer to m88 casino review Shanghai Securities News: Enticing Alpha Gains - Global Quantitative Giants Compete for Establishing China Funds, released on October 12, 2021, written by WANG Peng.