China’s equity markets were previously closed to foreign investors due to China’s exercise of tight capital controls which restricted the asset inflow and outflow. The Qualified Foreign Institutional Investor (QFII) scheme allows foreign access to China’s equity markets with restrictions on investment ratio, quota, targets and capital remittance controls.
QFII was first initiated as a pilot program in 2002 by the People’s Bank of China (PBoC) and the China Securities Regulatory Commission (CSRC), and then was promulgated in 2006 under the “Measures on the Administration of Securities Investments in China by Qualified Foreign Institutional Investors”. QFII refers to foreign fund management institutions, insurance companies, securities firms and other asset management institutions which satisfy the relevant statutory requirements, which are approved by the CSRC for making investments in the China securities market and have obtained a quota granted by the State Administration of Foreign Exchange (SAFE).
Candidates for QFII must have stable finance, good credibility and meet the minimum asset scale set by CSRC. The number of staff must also meet the requirements set by the relevant authority in its own country or area, and a sound governing structure and internal control systems must be in place with no significant misdemeanours in the candidate’s home country. A complete legal and supervision system must be in place in its home country or home area and a Memorandum of Understanding (MOU) with CSRC must have been signed along with an effective supervision cooperation. The CSRC also has other requirements based on prudence.