Qualified Foreign Institutional Investor

What is a Qualified Foreign Institutional Investor?

A Qualified Foreign Institutional Investor (QFII) refers to foreign institutional investors who meet the requirements and qualifications set by the China Securities Regulatory Commission (CSRC) and have obtained the qualification to invest in China's securities, futures, or other markets. These institutional investors include foreign fund management companies, commercial banks, insurance companies, securities companies, futures companies, trust companies, government investment institutions, sovereign funds, pension funds, charitable funds, endowment funds, and international organizations recognized by the CSRC.

The QFII scheme was established by the CSRC in 2002 to attract international capital into China's capital markets, promote the internationalization of the Chinese capital market, regulate the investment activities of foreign institutions in China's domestic securities and futures markets, and facilitate the stable and healthy development of China's securities and futures markets.

To become a QFII, an entity must meet specific requirements regarding asset size, investment experience, and risk management capabilities, and must go through an application and approval process with the CSRC. Once qualified, these foreign institutional investors can set up RMB or foreign exchange accounts to purchase A-shares and domestically listed B-shares, bonds, and other financial products in the Chinese securities market.

Standards for Qualified Foreign Institutional Investors

The standards for Qualified Foreign Institutional Investors are established and managed by the CSRC. Foreign institutions that meet the following conditions can become QFIIs.

1. Institution Type: Must be a legally established financial institution such as a foreign fund management company, bank, insurance company, securities company, etc.
2. Qualification Permit: QFIIs must obtain approval from the CSRC to invest in domestic securities, futures, and other markets.
3. Asset Size: QFIIs or their parent groups must meet the CSRC's minimum asset requirements, which vary by institution type. For example, an asset management institution must have managed securities assets of no less than $500 million in the most recent fiscal year.
4. Experience Requirements: QFIIs should have investment experience in securities, futures, or other markets and possess a robust investment management team.
5. Regulatory Approval: Foreign institutions or responsible persons for domestic business bidding need to obtain relevant investment permits or licenses from their home country's regulatory authorities.
6. Compliance: QFIIs must have sound and effective governance structures, internal controls, and compliance management systems. Over the past three years or since their establishment, they must not have faced significant penalties from regulatory authorities and should not present major risks to the domestic capital market.
7. Long-term Investment: Foreign institutions must demonstrate a long-term investment commitment to the Chinese capital market and be willing to undertake the corresponding risks.

Characteristics of Qualified Foreign Institutional Investors

As a crucial component of China’s financial market, QFIIs have the following characteristics:

1. Qualification Approval: Must be approved by the CSRC to invest in domestic securities, futures, or other markets.
2. Source of Funds: The funds used for domestic securities, futures, or other market investments must be in foreign exchange and must be a currency that can be listed and traded in China's foreign exchange market.
3. Investment Scope: Can invest in specified financial instruments, including stocks, bonds, funds, and financial derivatives, among others.
4. Custodial and Trading Agents: Must appoint qualified domestic institutions as custodians and trading agents. Custodians are responsible for safeguarding all assets, handling transaction settlements and currency exchanges, and supervising investment operations, while trading agents handle securities, futures, or other trading activities.
5. Supervision and Management: Under the supervision of the CSRC, the People's Bank of China, and the State Administration of Foreign Exchange. QFIIs must establish effective internal control and compliance management systems, fulfill information disclosure obligations, submit relevant business reports and statements as required, and be subject to necessary inquiries and inspections.
6. Diversified Investment: Can participate in China’s markets for stocks, bonds, funds, and other financial derivatives.

Advantages of Qualified Foreign Institutional Investors

QFIIs enjoy several advantages when participating in China’s financial markets:

1. Investment Scope: Can invest in various products within China's domestic securities, futures, or other markets, including stocks, bonds, depositary receipts, stock options, government-backed bonds, margin trading, securities lending, and bond repurchase agreements.
2. National Treatment: Managed according to the principle of equal treatment for domestic and foreign capital in fields outside the negative list for foreign investments. It reduces the entry barriers for foreign investment, increasing flexibility and convenience for foreign investors, and promotes fair competition and open development within the domestic market.
3. Convenient Settlement: Can directly handle currency conversion at banks without requiring approval for each transaction, simplifying the settlement process for foreign investments, reducing time, costs, and risks.
4. Tax Benefits: Can enjoy tax benefits according to China’s tax policies, thereby reducing investment costs.
5. Currency Risk: Can directly engage in RMB transactions, thus lowering exchange rate risk.
6. Transaction Convenience: Can settle funds and conduct transactions through domestic custodian banks, enhancing transaction convenience and efficiency.

Differences Between Qualified Foreign Institutional Investors and Qualified Investors

QFIIs and Qualified Investors are distinct concepts with the following differences:

1. Scope of Qualification: QFIIs refer to institutional investors registered outside China, such as foreign fund management companies, insurance companies, banks, etc. Qualified Investors are individuals or institutions meeting specific criteria and eligible to participate in certain investment activities, including both domestic and foreign investors.
2. Investment Scope: QFIIs primarily invest in assets such as stocks, bonds, and funds within mainland China. Qualified Investors' investment scope includes not only stocks, bonds, and funds but may also cover other financial products and markets.
3. Investment Restrictions: QFIIs are subject to certain restrictions on the scale and scope of investments in China's capital markets and require CSRC approval. Qualified Investors face relatively fewer investment restrictions and are not bound by QFII-specific constraints.
4. Source of Funds: QFIIs use foreign funds for investing in domestic securities, futures, or other markets. Qualified Investors use domestic funds for investing in domestic securities, futures, or other markets.
5. Regulatory Requirements: QFIIs must comply with relevant regulatory requirements and guidelines of the CSRC and other regulatory bodies. Qualified Investors are not subject to QFII-specific regulatory provisions.