Friday, May 03, 2013

On the Current State of China's Qualified Foreign Institutional Investors (QFII) Programs

Chinese authorities first promulgated the Provisional Measures on Administration of Domestic Securities Investments of Qualified Foreign Institutional Investors in 2002.  It has since been revised in 2006 and 2012 ongoing. 
(Pix (c) Larry Catá Bacjer 2013)
The QFII program is an open market program under the regulation of a national government designed to allow cross border capital markets transactions under controlled conditions.  Foreign investors need to follow regulation when entering the capital market of this country and get the approval of the national government. The recipient nation will limit the foreign investors on many aspects including: qualification, registration, Investment proportion, quota limitation, investment object, investment frame and regulations on transfer in and out of foreign currency. When a country or district fully prepares to wholly open its capital market, this program could be abolished by the national government.

One of my students, Weng Huang, has produced an interesting analysis of China's Qualified Foreign Institutional Investor program.  She argues that the regulation have become a drag on China's ability to deeply engage in global securities markets and that the recent efforts to modify the regulations ought to be the foundation of a comprehensive and liberalizing codification.  The introduction and conclusion follow.  The paper may be accessed HERE.


Weng Huang


On November. 5, 2002, the Provisional Measures on Administration of Domestic Securities Investments of Qualified Foreign Institutional Investors (hereinafter the 2002 Provisional Measures) was promulgated by China Securities Regulatory Commission (hereinafter CSRC) and People’s Bank of China (hereinafter PBOC), which marked the starting point of China’s Qualified Foreign Institutional Investors (hereinafter QFII) program. After all the preliminaries, “it was little wonder that it was nearly seven months before the first trade was consummated on June 10, 2003. UBS (United Bank of Switzerland) placed four small but symbolic orders in shares of BaoSteel, ZTE Corp, Shanghai Port Container, and Sinotrans Air Transport to its local broker, Shenyin Wanguo. This was historic news for the domestic market.”[1]

Law should be revised to changes of the times.[2] China is prudently doing its introspective economic reform step by step by modifying its statutes or regulations related to economy. The main regulations regarding to QFII has been revised twice: the first amendment was in 2006, which was 4 years after this program initially launched in China; from 2012 to 2013, the second amendment is orderly processing.

The latest modification on the regulation of QFII will be a good law which will adapt to the developing of China’s economic development compared to the 2006 Measures. However, with more and more laws and regulations released, some issues are becoming more complicated. A timely updated codification on QFII is needed at present based on the new revised regulations.

The topic of QFII is popular not only for Chinese scholars but for foreign investors at present. Helping them know what is happening inside China, especially on the economy or legal aspect is the main purpose of this paper. More specific, this paper will help foreign investors get a comprehensive understanding of the latest new regulations on QFII in today’s China. This paper gives some background about the QFII program and China’s stock market at first, then introduces the Qualified Foreign Institutional Investors program in today’s China, and gives a comparative thinking on the regulation of China’s QFII program between 2006 regulations and the 2012-2013 regulations. Finally, I will make a proposal that China need a timely updated codification on QFII at present. 

. . . . . .
III. The Operation of QFII and the Current Situation in China
 . . . . .
D. A codification on QFII is needed in the future

1. The effectiveness of some regulations are confusing

As mentioned above, except the 2012 SAFE Regulation and 2013 SAFE Notice, another official document is also exist, that is the 2011 Technical Question Solutions. The effectiveness of this document is challenged.

From the name of this official document: Relevant Technical Question Solutions on the 2009 SAFE Regulation and 2011 SAFE Notice, we could conclude that this document was solving technical questions about the 2009 SAFE Regulation and 2011 SAFE Notice, both of which were replaced by the new regulations. If those old regulations were replaced, the derived document is most likely invalid.

However, on the first part of this document, SAFE gave a clear indication that this document was an organization of a public consultation when SAFE prepared to release the 2009 SAFE Regulation and 2011 SAFE Notice and this document was for the reference of the relevant department. As a specific regulation in order to solve specific operation problems, this document gave some method on, for example, how to calculate the exchange rate between US dollars and other foreign exchanges, and some examples were based on China’s Audit Law. In my opinion, this document solves some basic technical questions. It is unnecessary to call this document invalid otherwise a new technical regulation comes out.

2. Codification is needed in the future

a. The reason why codification is needed

When I am doing research for this paper, the confusing regulations and implemental provisions make me lost at sea. How many regulations are still valid, which administrative office are in charge of those complex process. Questions like these have occupied my head and made me have to stop and carefully read those regulations. I believe those potential foreign investors or Chinese lawyers may have the same feeling like me.

For example, CSRC, SAFE and PBOC all have regulations or notice on QFII, if the basic regulation changed, before the matched implemental provisions released, does the original implemental provisions apply? More specific, SAFE released the 2012 SAFE regulations in December 2012, before the 2013 SAFE Notice came out, does the 2011 SAFE Notice which is based on the 2009 SAFE Regulation apply? How to deal with the conflict provisions if it applies?

The reason for this situation is China’s economy is growing too fast, and almost every week new policy will come out thereby influences the amendment of laws and regulations. For example, the SAFE Regulation has been updated almost every 2 years, and the SAFE Notice will also update accordingly. The bad consequence of this frequent updating is there are too much legal documents, and it is so hard to distinguish which one to follow.

b. Create a timely updated codification

There is no official codification about QFII under the current law system, some regulation assembly that could be found online are coming from private institution like law firm. This kind of assembly has no authority and it is hard to tell which regulation or measure is abolished at a specific time.

A timely updated official codification is needed at this moment. This codification shall be compiled by a special QFII legal committee which is composed with experts from CSRC, PBOC, SAFE and SSE or SZSE. This special QFII legal committee should only be responsible for the effectiveness of the existing legal documents.

A codification is urgently needed at present, but paper work will always behind the time. In my opinion, the best way for letting foreign investors or Chinese lawyers getting aware of the timely updated situation is to build up a codification website and make the latest regulations attached. A special mark on the regulations which has already been invalid is also needed. In addition, an English version of those regulations is also needed since some of the audiences are foreign people.

Official legal service is a weak point in today’s China, this reform not only need the government’s action, more important, the government should change its attitude from “control” to “service”. Whether this suggestion will be adopted by the current government depends on the determination on legal reform by the current government.


The Qualified Foreign Institutional Investors system has developed in China for more than 10 years. From the tough beginning to the current stable situation, revising regulation has played an important role during the ten years. The new regulation is modified to keep pace with the times, but some key problems are still existed.

The biggest problem that we are facing now is the regulations are immethodical. Some scholars advocated that in order to complete QFII regulation, China should make a systematic QFII legislation under the Trust Law.[1] However, the fact is QFII program is a transitional program. Taiwan has abolished this program in 2003. How could mainland be sure that this program won’t be replaced following the reform and developing of the mainland’s economy system?

Indeed, China needs a systematic legislation on QFII. Lacking the codification On QFII is so inconvenient for the operation of lawyers and foreign investors. Making new law might be costly to a transitive program, but at least legislators need to release a timely updated codification or create a special subject website on QFII for lawyers and foreign investors.


[1] Zhang Xiaoling, Yang Yueping, A Research on Cross-Board Indirect Ownership Under QFII, International Economy Research, 68-74 (2004)

[1] Carl E Walter; Fraser J T Howie, Privatizing China : inside China's stock markets 246,(2006)

[2] See Ji Weidong , Social Change and the Function of Law, Open Times, 34, 34-35 (2002)

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