What Is a Qualified Foreign Institutional Investor (QFII)?

What Is a Qualified Foreign Institutional Investor (QFII)?

Let me explain what the Qualified Foreign Institutional Investor, or QFII, really is. It's a program that lets specific licensed international investors get involved in mainland China's stock exchanges.

You should know that China introduced the QFII program in 2002 to give foreign institutional investors the ability to trade on the Shanghai and Shenzhen stock exchanges. Before this, no foreign investors could buy or sell stocks there because of China's strict capital controls.

Key Takeaways

The Chinese government launched the QFII program in 2002, and it provides certain licensed international investors with opportunities to invest in China's stock exchanges. Through QFII, foreign institutional investors can buy and sell yuan-denominated A-shares of Chinese companies. There's also a similar program called Renminbi Qualified Foreign Institutional Investor, or RQFII, which has fewer restrictions and simplifies direct investment in China's domestic capital markets.

Understanding Qualified Foreign Institutional Investor (QFII)

When the QFII program started in 2002, it allowed licensed institutional investors to purchase and sell yuan-denominated A-shares, which are shares of companies based in mainland China. However, foreign access was limited by specific quotas set by the Chinese government to control how much money licensed foreign investors could put into China's capital markets.

In April 2012, a decade after launch, the QFII quota increased from $30 billion to $80 billion. These quotas come from China's State Administration of Foreign Exchange, known as SAFE, and they can change anytime based on the country's economic and financial situation. To draw in more foreign investment, SAFE removed quota restrictions in September 2019.

Under the QFII system, you can trade listed stocks—excluding foreign-oriented shares—along with treasury bonds, corporate debentures, convertible bonds, and other financial instruments approved by the China Securities Regulatory Commission, or CSRC.

Fast Fact

In 2019, nearly 300 overseas institutions received QFII quotas that added up to about $111.4 billion.

Qualified Foreign Institutional Investor (QFII) Qualifications

Back when the CSRC launched the QFII program in 2002, investors had to meet certain prerequisites to get accepted, and these depended on the type of institutional investor, like a fund management company or insurance business.

For instance, fund management companies needed at least five years of asset management experience and no less than $5 billion in assets under management in the most recent accounting year. Approval also required transferring and converting a certain amount of foreign currency to local currency.

From 2016 onward, the CSRC started reforming the QFII program to pull in more foreign capital. They began easing qualifications, and in 2019, they simplified rules by dropping the assets under management criteria and the required years of experience for foreign investors.

QFII vs. RQFII

In December 2011, the CSRC kicked off the Renminbi Qualified Foreign Institutional Investor program, or RQFII, which is similar to QFII in allowing foreign investors to invest in China's stock exchanges.

The differences mainly involve easing restrictions that made QFII harder to access. For example, QFII participants must convert foreign currency to renminbi before investing in Chinese securities, but RQFII participants can invest directly in domestic capital markets without that conversion.

Special Considerations

Before June 2018, foreign institutions using the QFII program to invest in China's stock or bond markets could only repatriate up to 20% of their investments each month. Also, the first time a QFII participant tried to move money out of China, a three-month lock-up restriction blocked them. But that's changed now.

As of mid-June 2018, China removed the 20% remittance ceiling and the three-month lock-up for all new and existing QFII participants. On top of that, China now lets QFIIs use hedging to manage foreign exchange risks.

These updates, combined with lifting quota restrictions, are China's way of making their bond and stock markets more appealing to international investors. In 2019, the securities regulator announced plans to merge the QFII and RQFII programs eventually as part of reforms to boost foreign investor participation.

What Is a Qualified Domestic Institutional Investor (QDII)?

QDII is a designation that started in China in 2006, allowing five types of Chinese entities—insurance companies, banks, trust companies, funds, and securities firms—to invest abroad in non-Chinese markets.

What Did the Qualified Foreign Institutional Investor (QFII) Designation Do?

Before 2002, foreign investors couldn't buy or sell stocks on Chinese exchanges. The QFII program changed that by lifting tight capital controls and authorizing some foreign institutional investors to trade on the Shanghai and Shenzhen exchanges.

How Can U.S. Individuals Invest in Chinese Stocks?

Individuals can't qualify as QFII, so if you're an American investor, the simplest way to access Chinese stocks is through American Depositary Receipts, or ADRs, of Chinese companies listed on U.S. exchanges, or via ETFs that track Chinese markets.