Qualified Foreign Institutional Investor (QFII)

A program that enables certain foreign institutional investors to gain direct access to trade “A-shares” of Chinese stocks

What is a Qualified Foreign Institutional Investor (QFII)?

Qualified Foreign Institutional Investor (QFII) is a program launched by the Chinese government in 2002 that enables certain foreign institutional investors to gain direct access to trade “A-shares” of Chinese stocks, denominated in China’s renminbi/yuan (RMB), on Chinese stock exchanges such as the Shanghai Exchange.

 

Qualified Foreign Institutional Investor (QFII)

 

Before the introduction of the program, foreign investors could only trade stocks of China-based companies in the form of “B-shares” traded on Chinese exchanges but denominated in US dollars or Hong Kong dollars, “H-shares” traded on the Hong Kong Stock Exchange, or “N shares,” which are listings of Chinese stocks on stock exchanges in the US.

China’s motivation for creating the Qualified Foreign Institutional Investor program was two-fold: to elicit more foreign investment in Chinese business enterprises, and to further strengthen the RMB’s position as a major world currency.

Once they obtain a qualified investor license from the Chinese government, foreign investors can buy and sell RMB-denominated “A-shares” listed on the Shanghai or Shenzhen Stock Exchanges.

 

Summary

  • Qualified Foreign Institutional Investor (QFII) is a term used to describe a program launched by the Chinese government in 2002 that enables foreign institutional investors to gain direct access to trade “A-shares” of Chinese stocks, denominated in China’s renminbi/yuan (RMB), on Chinese stock exchanges.
  • The QFII program is designed to increase foreign investment in China-based businesses and to increase the use of China’s renminbi/yuan as a major world currency.
  • The program is administered by the China Securities Regulatory Commission (CSRC).

 

How to Qualify as a Qualified Foreign Institutional Investor (QFII)

The following are the basic requirements for obtaining a license as a Qualified Foreign Institutional Investor (QFII):

  • The foreign institutional investor (such as a mutual fund management firm) must be assessed by the appointed Chinese government agency as being “reputable and financially sound.” It’s been determined with requirements that the investor show a certain level of assets under management (AUM) – for example, an initial requirement when the QFII program was first launched was that the foreign investor’s total AUM must be at least $5 million.
  • Foreign investors must be free of any type of disciplinary action imposed upon them by any financial regulatory authority or agency within the three-year period immediately preceding their application to the QFII program.
  • Other, more specific requirements related to the general requirement to be “reputable and financially sound,” such as the number of years that the foreign investor has been in business, may also be imposed by the China Securities Regulatory Commission (CSRC), the regulatory agency that administers the program.
  • There must be a signed Memorandum of Understanding (MOU) between the CSRC and the regulatory financial authority that governs the foreign investor in their home country. The agreement must include an assurance by the foreign investor’s home country regulatory agency that it will carefully supervise the investment firm for the duration of the agreement.

 

Operation of the QFII Program

The China Securities Regulatory Commission initially maintained very tight quota controls over the access and operational ability of licensed Qualified Foreign Institutional Investors, limiting the total amount of money that the foreign investor can invest in Chinese publicly traded companies during any given year.

Each licensed investor is required to set up an account with a custodian bank, approved by the CSRC, that opens trading accounts for the investor, handles securities and cash settlements, and acts as a liaison between the qualified investor and the CSRC.

The CSRC also tightly limited the total amount of capital that a licensed foreign investor can annually repatriate to its home country. In addition, any movement of investment capital out of China by qualified foreign investors must first receive approval from the CSRC, after which the money was subject to a three-month “lock-up period” before it can be transferred abroad.

 

Program Expansion and Relaxation of Rules

In the years since the Qualified Foreign Institutional Investor program was created, the CSRC has rapidly increased the quota amounts and loosened other restrictions that the program initially had in place.

For example, the quota on the total amount of capital that foreign investors can invest in Chinese securities through the program was raised by more than 100%, from a level of $30 billion to $80 billion, in 2012. The restrictions on moving investment capital back to a foreign investor’s home country have also since been largely done away with, and the three-month lockup period regulation has been abandoned.

The types of securities available to QFII program participants have also been expanded to include exchange-traded funds (ETFs), stock warrants, stock index futures, and various financial derivatives, aside from regular Chinese stocks and bonds. The expanded financial product selection enables qualified foreign investors to, among other things, hedge their investments against foreign exchange risk more easily.

To offset concerns about foreign investors obtaining an ever-increasing share of Chinese securities, a companion program to the QFII program was created in 2012 – the Qualified Domestic Institutional Investor (QDII) program, which facilitates the ability of large, domestic Chinese investors to invest in foreign securities markets.

As of 2020, Qualified Foreign Institutional Investors use the services of more than 20 Chinese brokerage firms, with the CSRC approving nearly 200 foreign investors for the QFII program. Among the largest participating institutional investors are UBS Group AG (NYSE: UBS) and JPMorgan Chase Bank (NYSE: JPM).

 

Related Readings

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  • Capital Markets
  • Stock Exchange-Traded Fund (ETF)
  • Stock Warrants

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