Unlocking the potential of QFII and RQFII: A guide for investors in China

Designed to help open up China’s onshore capital markets to global investors, the QFII and RQFII schemes have undergone recent changes aimed at reducing red tape and increasing investor inflows into the country

China 28 Feb 2024 5 min read

Over the past two decades, regulators in China have introduced a number of policies aimed at encouraging foreign investors to participate in the country’s financial markets. Perhaps the most important of these are the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes, both of which facilitate the involvement of asset management companies, insurers, pension funds and other institutions in trading securities in China.

Since they were introduced, QFII and RQFII have undergone several changes designed to make the schemes simpler to use and more widely available to investors around the world (see timeline, below). Both schemes allow foreign institutions to invest in a wide range of shares, bonds, derivatives and private investment funds traded on exchanges on the Chinese mainland.

A brief history of QFII and RQFII

QFII was launched in 2002 to encourage institutional investors from outside China to invest in its domestic capital market, thereby promoting the renminbi's internationalization. The scheme provided licenses to foreign investors that permitted them to trade securities on mainland China markets – specifically, the stock exchanges based in Shanghai and Shenzhen.

The RQFII programme was introduced at the end of 2011. The key difference between RQFII and QFII is that the former scheme allows foreign institutions to use renminbi, held offshore, to invest directly in the mainland securities exchanges mentioned above. Under QFII, investors must convert foreign currency into renminbi before investing.

Initially, Chinese authorities imposed quotas on foreign investors to control the total amount of capital coming into the country. These quotas were expanded during the early years of the schemes and then abolished. Similarly, QFII initially only permitted trading in certain types of securities, such as specific classes of company shares and bonds. These restrictions have also been eased (though not completely).

How the schemes operate

To take advantage of either the QFII and/or RQFII scheme, foreign investors need to apply for the relevant licence from the China Securities Regulatory Commission (CSRC). Once this has been approved, firms must then register with the State Administration of Foreign Exchange (SAFE) before making any investments. By registering with SAFE, investors can open onshore cash accounts, make remittances and repatriate funds when required.

To participate in the QFII and/or RQFII scheme, investors must be based in an approved jurisdiction. However, regulators in China have now approved over 30 countries for participation in these schemes.¹

Key changes in 2020

To increase the take-up of QFII and RQFII, the Chinese government made a number of changes to the schemes, primarily aimed at making them simpler to use and more widely available. Until late 2020, QFII and RQFII had operated as separate programmes but the two schemes were brought together under a single regulatory framework called the Qualified Investor (QI) scheme in November of that year.²

Other changes introduced at the time included:

Expanding the scope of permitted investments to include stock options and government-backed bonds, among others. Investors are now also allowed to engage in activities such as margin trading and the borrowing and lending of securities.
A relaxation of reporting requirements to reduce the regulatory burden of participating in the QFII and RQFII schemes.
A reduction of the foreign shareholding notification threshold, from 26% of a company’s A-shares to 24%. (Under existing rules, the foreign shareholding of a Chinese company cannot exceed 30%, so this change would in theory give market participants greater warning that the limit is being approached.)
Strengthening of the continuous supervision regime, which also clarified foreign investors’ obligations with regard to information disclosure.

In November 2023, it was reported that the People’s Bank of China (PBOC) and SAFE were developing updates to the QFII and RQFII systems.³ Proposals included a simpler process for registering funds with SAFE, fewer restrictions on the remittance of earnings outside China and new rules relating to the management of foreign exchange risk.

Alternatives to QFII and RQFII in the Chinese market

QFII and RQFII are not the only ways for foreign investors to directly participate in Chinese markets:

Stock Connect: This programme allows investors in mainland China and Hong Kong to have direct access to each other’s markets. For foreign institutions, this means they can open a trading account in Hong Kong and gain access to markets in Shanghai and Shenzhen. Stock Connect only provides access to certain eligible shares, and trading is subject to daily quotas on purchases.
Bond Connect: China also has a similar scheme for investment in bonds, allowing investors registered in Hong Kong to buy onshore bonds and vice-versa.
China Interbank Bond Market Direct: This is another bond-investment scheme, although unlike Bond Connect it is based onshore.

However, both QFII and RQFII permit a much broader range of investment types, and participants in the schemes are not affected by market-wide quotas.