Qualified Foreign Institutional Investor (QFII) Definition, Rules

What Is a Qualified Foreign Institutional Investor (QFII)?

The Qualified Foreign Institutional Investor (QFII) is a program that allows specified licensed international investors to participate in mainland China's stock exchanges.

The Qualified Foreign Institutional Investor program was introduced by the People's Republic of China in 2002 to provide foreign institutional investors with the right to trade on stock exchanges in Shanghai and Shenzhen. Before the launch of the QFII program, investors from other nations were not allowed to buy or sell stocks on Chinese exchanges due to the country’s tight capital controls.

Understanding Qualified Foreign Institutional Investor (QFII)

With the launch of the Qualified Foreign Institutional Investor (QFII) program in 2002, licensed institutional investors were allowed to purchase and sell yuan-denominated "A" shares, which are shares of mainland China-based companies. However, specified quotas constrained foreign access to these shares. The Chinese government used these quotas to regulate the amount of money that licensed foreign investors could invest in China's capital markets.

The QFII program quota was increased from $30 billion to $80 billion in April 2012, a decade after the program launched. The quotas are granted by China's State Administration of Foreign Exchange (SAFE), and the quotas can be changed at any time in response to the country's current economic and financial conditions. In an effort to attract more foreign investment, SAFE announced it was eliminating quota restrictions in Sept. 2019.

The type of investments that can be traded as part of the QFII system includes listed stocks (but excludes foreign-oriented shares), treasury bonds, corporate debentures, convertible bonds, and other financial instruments as approved by the China Securities Regulatory Commission (CSRC).

Qualified Foreign Institutional Investor (QFII) Qualifications

When the CSRC first launched the QFII program in 2002, it mandated that certain prerequisites had to be met for investors to be accepted into the program. The CSRC determined these qualifications by the type of institutional investor who applied for a license, such as a fund management company or insurance business.

For example, fund management companies had to have at least five years of asset management experience and at least $5 billion of assets under management during the most recent accounting year. A certain amount of foreign currency, transferred and converted to local currency, was also mandatory for approval.

Starting in 2016, the CSRC began a series of reforms to the QFII program with the goal of attracting more foreign capital. The CSRC began to loosen investor qualifications for the QFFI program. In 2019, the CSRC announced simplified rules that removed the assets under management (AUM) criteria and years of experience needed by foreign investors.

QFII vs. RQFII

In Dec. 2011, the CSRC started the Renminbi Qualified Foreign Institutional Investor (RQFII) program. Similar to the QFII program, the RQFII program allows foreign investors the opportunity to invest in China's stock exchanges.

There are differences between the RQFII program and the QFII program, most of which have to do with easing restrictions on investors that made accessing the QFII program difficult. For example, QFII program participants must convert their foreign currency into renminbi before investing in Chinese securities. RQFII participants, however, do not need to convert their currency and can invest directly in China's domestic capital markets.

Special Considerations

Prior to June 2018, foreign institutions invested in China’s stock or bond markets through the QFII program could only repatriate up to 20% of its investments every month. Also, each time a QFII participant sought to move money out of China for the first time, they were prevented from doing so by a three-month “lock-up” restriction. However, that has now changed.

As of mid-June 2018, China lifted both the 20% remittance ceiling and the three-month lock-up period for all new and existing QFII participants. As an added incentive, China allows QFIIs to perform hedging to manage foreign exchange risks.

These new rules, along with the lifting of quota restrictions, are seen as China's attempts to make trading in their bond and stock markets more widely accepted among international investors. In 2019, China's securities regulator announced plans to eventually combine the QFII and RQFII programs as part of its reforms to increase foreign investor participation.