Introduction to the Qualified Foreign Institutional Investor (QFII) Programme

What is QFII The Chinese government launched the Qualified Foreign Institutional Investor programme (QFII) in November 2002 to allow foreign investors controlled access to the country's $500 billion stock market and fledgling bond markets in order to help push forward reform of the domestic capital markets. China maintains strict controls on the flow of capital going in and out of the country. Foreign investors previously had access to a limited number of listed companies in China through the hard-currency B-share stock markets in Shanghai and Shenzhen. But the launch of QFII gave foreign investors the opportunity to buy shares in more than 1,000 companies listed on the yuan-denominated A-share stock market and to buy corporate and government bonds. The Chinese government hoped that bringing in mature institutional investors with a long-term approach to investing in the capital markets would help stabilize stock markets that were mainly used by speculators for short-term gain. The launch of QFII was widely seen as a milestone in the development of China's capital markets which were re-opened in the 1990s as part of the country's reform and opening policies. Swiss investment bank UBS AG and Japanese brokerage Nomura Securities Co. Ltd., were the first foreign investors to gain a QFII licence on May 26 2003. UBS was given an investment quota of $300 million, while Nomura was awarded a quota of $50 million. UBS made its first stock purchases under the QFII plan on July 9 2003, formally inaugurating the programme. As of November 30 2005, QFII licences have been awarded to 32 foreign institutions including some of the world's biggest investment banks - Goldman Sachs, Morgan Stanley and Merrill Lynch - and even Microsoft's founder Bill Gates. These companies have been given permission to invest a total of $534.5 million in yuan-denominated stocks and bonds. Who can become a QFII The China Securities Regulatory Commission (CSRC) which regulates the QFII programme with the State Administration of Foreign Exchange (SAFE) has so far given authorization to fund management companies, insurance companies, securities companies and other types of asset management to become QFIIs. Investors must have more than $10 billion of assets under management worldwide and preference is given to institutions with good investment track records. What can a QFII invest in So far, the CSRC has allowed QFIIs to invest in yuan-denominated A-shares listed on the Shanghai and Shenzhen stock exchanges, government bonds, convertible bonds and corporate bonds and non-tradable state-owned shares. How to become a QFII In order to become a QFII, a foreign investor must appoint a custodian bank to administer their investments and a broker to execute the buying and selling of securities. Applications for QFII status are handled by the custodian bank. After approval by the China Securities Regulatory Commission, a QFII is awarded an investment quota by the State Administration of Foreign Exchange.