Announcement of the State Administration of Foreign Exchange_Rules and Regulations

Rules and Regulations

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2009-11-13
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State Administration of Foreign Exchange
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Announcement of the State Administration of Foreign Exchange

Announcement of the State Administration of Foreign Exchange

Decree [2009] No. 1

Pursuant to the Regulations of the People's Republic of China on Foreign Exchange Administration and the Measures for Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII) (Decree [2006] No. 36 of the CSRC, PBOC, and SAFE), the Regulation on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII), which will enter into effect from the date of promulgation, is hereby promulgated.
September 29, 2009

Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII)
Chapter 1 General Provisions
Article 1 For the purpose of standardizing the foreign exchange administration of Qualified Foreign Institutional Investors (hereinafter referred to as QFII) in China's securities market, these Regulations are promulgated based on the Regulations of the People's Republic of China on Foreign Exchange Administration and the Measures for Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII) (Decree [2006] No. 36 of the CSRC, PBOC, and SAFE).
Article 2 The QFII shall mandate its domestic custodian (hereinafter referred to as custodian) to go through all the relevant procedures as required by these Regulations.
Article 3 The QFII and its custodian shall comply with the relevant regulations of Chinas foreign exchange administration.
Article 4 The branches and foreign exchange administrative departments of the State Administration of Foreign Exchange (hereinafter referred to as AFEs) shall, in compliance with the relevant laws and regulations, exercise supervision, management, and inspection over the investment quota, fund accounts, fund receipts and payments, and exchange, and so forth.
Chapter 2

Investment Quota Administration
Article 5 The QFIIs domestic securities investments are subject to quota administration. The State Administration of Foreign Exchange (hereinafter referred to as the SAFE) approves the investment quota of single QFIIs and encourages mid-term and long-term investments.
Article 6 The following materials shall be submitted to the SAFE when the QFII applies for an investment quota and to open foreign exchange accounts and a special RMB accounts:
1) A written application submitted by the QFII and its custodian, including the basic information on the QFII, the source of funds, the investment plan, the QFIIs letter of commitment that no capital shall be withdrawn during the lock-up period, and so on, along with the Registration Form for Qualified Foreign Institutional Investors by the SAFE. (See Attachment 1 for a sample.)
2) Photocopies of the License for the Securities Investment Business of Qualified Foreign Institutional Investorsissued by the China Securities Regulatory Commission (hereinafter referred to as the "CSRC").
3) The QFIIs notarized power of attorney to the custodian.
4) Other materials as required by the SAFE
QFIIs that apply to increase the investment quota shall provide, apart from the aforesaid 1) and 4), the Foreign Exchange Registration Certificate for Qualified Foreign Institutional Investors (hereinafter referred to as the FERC), and a report on the domestic investments of the approved investment quota, including asset allocations and changes, investment profits and losses, compliance, average stock turnover, and so forth.
Article 7 An application for a single QFII investment quota shall not be less than an amount equivalent to USD 50 million for each time, but not more than an amount equivalent to a total of USD 1 billion. The SAFE may adjust the aforesaid limits in accordance with the economic and financial situations, the supply and demand relations in the foreign exchange market, the status of the balance of payments, and other factors.
The QFII shall not, within 1 year after the approval of the investment quota, apply for an increase in its investment quota.

Article 8 The QFII should, within 6 months after the date of approval of each investment quota, remit the principal inward; should it be overdue, the QFII shall not remit the principal inward unless it is approved. Should the remitted principal be not the full prescribed amount but in excess of the equivalent of USD 20 million, the actually remitted amount shall be deemed to be its investment quota.
In the event that the QFII remits the principal in non-U.S. Dollar currencies, it is necessary to calculate the remitted U.S. Dollar equivalent of the investment quota with reference to the Conversion Rate Table of All Currencies to the U.S. Dollarissued by the SAFE in the month when the outward remittance takes place.
Article 9 For QFIIs, such as pension funds, insurance funds, mutual funds, charity funds, endowment funds, government and monetary authorities, and open-ended Chinese funds initiated and established by QFIIs, the lock-up period of the principal is 3 months; for other QFIIs, the period is 1 year.
The lock-up period of a QFIIs principal shall be calculated from the date of the remittance of the full amount of the principal; in the event of a failure to remit the principal within the prescribed period of time, the lock-up period shall be calculated 6 months after the date when the investment quota is approved.
The aforesaid open-ended Chinese funds refer to open-ended securities investment funds that are established abroad in public offerings, with over 70% of the funds invested in China. The QFII shall report and file, within 20 working days after the initiation and establishment of open-ended Chinese funds, the original fund prospectuses and Chinese translations of its basic contents to the SAFE.
The aforesaid lock-up period refers to the period in which the QFIIs are forbidden from remitting the principal abroad.
Chapter 3 Account Administration
Article 10 With the approval of the investment quota and the account opening issued by the SAFE, the QFII can, in the location of its custodian, open a foreign exchange account and a corresponding special RMB account for its own funds or for its clientsfunds for which it provides asset management services, respectively.
QFIIs that establish open-ended Chinese funds shall open a foreign exchange account and a corresponding special RMB account for each of the funds.
The custodian shall, within 5 working days after the opening of the QFIIs foreign exchange account and special RMB account, file with the AFE in the place where it is located, and report the formal custody agreement to the SAFE and receive the FERC for the QFII.
Article 11 The income in the QFIIs foreign exchange accounts shall includes principals remitted from abroad by the QFII, interest income, funds remitted inward by purchasing foreign exchange through the QFIIs special RMB accounts, and other income approved by the SAFE. Expenditures shall include funds remitted to the QFIIs special RMB accounts by exchange settlement, funds remitted abroad by the same route as remitted inward, and other expenditures approved by the SAFE.
The income in the QFIIs special RMB accounts shall include funds remitted inwards from the QFIIs foreign exchange accounts by exchange settlement, the proceeds from the sales of securities, cash dividends, interest income, and other income approved by the SAFE; expenditures shall include expenses for purchasing the prescribed products, such as securities (including stamp duties, service charges, etc.), taxes and duties, such as taxes, custody fees, audit fees, and overhead expenses, funds remitted to the QFIIs foreign exchange accounts with purchased foreign exchange, and other expenditures approved by the SAFE.
Funds in the QFIIs foreign exchange accounts and special RMB accounts shall not be used for any purposes other than domestic securities investments.
Article 12 Funds shall not be transferred among the QFIIs fund accounts, clientsfund accounts, and accounts for open-ended Chinese funds accounts, or among multiple accounts for open-ended Chinese funds under a single QFII.
Article 13 The deposit rates for the QFIIs foreign exchange accounts and special RMB accounts shall be applied in accordance with the relevant regulations as promulgated by the Peoples Bank of China.
Article 14 When a QFII is involved in one of the following circumstances, it shall be subject to punishment of the realization of its assets within one month, the closing of its foreign exchange accounts and special RMB accounts opened at the location of its custodian, and repeal of its corresponding investment quota:
1) The CSRC has revoked its license for securities investment business;
2) The amount of funds remitted inward by the QFII within 6 months after the first approval of the investment quota is less than the equivalent of USD 20 million;
3) The amount of the remaining principal left in China is less than the equivalent of USD 20 million due to the QFIIs repatriation of investments abroad;
4) The SAFE revokes the QFIIs investment quota in compliance with these Regulations;
5) Other circumstances as prescribed by the SAFE.

The custodian shall, within 5 working days after the closing of the QFIIs foreign exchange accounts and special RMB accounts, file with the AFE in the place where it is located, and return the FERC to the SAFE.
Chapter 4 Exchange Management
Article 15 The QFII can, in accordance with the investment plan and the relevant reports that are provided when applying for an investment quota, within 10 working days prior to the actual investment taking place, advise its custodian to process the exchange settlement necessary for the investment and remit the funds to its special RMB account.
A QFII that remits an amount of accumulated investment principal that is less than the equivalent of USD 20 million shall not process exchange settlements and investments.
Article 16 Upon the termination of the lock-up period, open-ended Chinese funds can, based on the monthly subscribed or redeemed net amount, process the relevant inward or outward remittance of funds on a monthly basis
In the event of net redemptions, the principal remitted outwards therein shall be calculated according to the ratio of the QFIIs investment principal and profits and losses on the last transaction day of the month prior to the outward remittance as confirmed by the custodian, and then that amount shall be deemed to be the approved amount for the next inward remittance of investment funds.
In the event of net subscriptions of open-ended Chinese funds, should the exchange settlement funds remitted inward each time not be the equivalent of USD 50 million or more, the custodian can go directly through the relevant procedures on its behalf, and then file with the AFE in the place where the custodian is located; should they exceed the equivalent of USD 50 million, the open-ended Chinese funds shall, within 10 working days in advance, file an application with the AFE in the place where the custodian is located along with the photocopies of the FERC, and shall carry out the relevant procedures unless approval is granted by the aforesaid AFE.
In the event of net redemptions of the open-ended Chinese funds, should the funds remitted outward with foreign exchange purchased each time not be the equivalent of USD 50 million or more, the custodian can directly go through the relevant procedures on its behalf, and then file with the AFE in the place where the custodian is located; should they exceed the equivalent of USD 50 million, the open-ended Chinese funds shall, within 10 working days in advance, file a written application with the AFE in the place where the custodian is located, along with a written application, photocopies of the FERC, and a report on investment profits and losses, and shall not go through the relevant procedures without the approval of the aforesaid AFE.
Article 17 In the event that the QFII needs to remit the principal, with purchased foreign exchange upon the termination of the lock-up period of the investment principal, other than open-ended Chinese funds, the following application materials shall be submitted to the SAFE for approval:
1) A written application
2) The original copy of the FERC
3) A report on the inward remittances of the principal and past investments
4) Other materials as required by the SAFE
After the examination and verification of the aforesaid materials, the SAFE shall issue an approval document, and correspondingly decrease the QFIIs investment quota. The custodian shall go through the procedures for foreign exchange purchases and outward remittances of funds on the QFIIs behalf with the approval of the SAFE.
Article 18 In the event that the QFII needs to remit outwards the accumulated proceeds realized with purchased foreign exchange, other than for open-ended Chinese funds, it shall, upon the issuance of a special audit report by a Chinese certified public accountant, delegate its custodian to file an application with the AFE where the custodian is located on its behalf with the following materials:
1) A written application and the relevant documents attesting to the decision on the remittance of the proceeds;
2) The original copy of the FERC;
3) A special audit report on the investment proceeds issued by a Chinese certified public accountant;
4) Tax payment documentation on the proceeds;
5) Other materials as required by the AFE.
After the examination and verification of the above-mentioned materials, the AFE in the place where the custodian is located, shall issue an approval document, which can be used by the custodian to go through the procedures for exchange purchases and outward remittances of funds on behalf of the QFII.
Article 19 The custodian shall, in an accurate and timely manner, record on the FERC the situation regarding the remittance/exchange and receipt and payment of the QFIIs funds.
Article 20 The SAFE may, in accordance with Chinas economic and financial situations, supply and demand relations in the foreign exchange market, and status of the balance of payments, adjust the time, amount, and period for the outward remittances of funds by the QFII.
Chapter 5 Statistics, Supervision, and Administration
Article 21 When a QFII is involved in one of the following circumstances, it shall within 5 working days go through the procedures with the SAFE to change the FERC and submit a written report to the SAFE
1) Changes in its basic information such as the name, responsible leader, major shareholders, or actual controller of the QFII;
2) The QFII or its major shareholders or actual controller face significant penalties by other regulatory authorities (including foreign authorities), and the penalties thereof shall exert a significant influence on the QFIIs investment operations, or the relevant business licenses are suspended or revoked;
3) The custodian or the entrusted domestic investment institutions (brokers) are changed or important information thereof is changed;
4) There are changes in the account name, information on the account, and so forth;
5) Changes in the fund prospectuses of the open-ended Chinese funds;
6) Other situations as prescribed by the SAFE.
In the event that the QFII changes its custodian, the new custodian shall provide, apart from the aforesaid materials, a draft of a newly signed escrow agreement, basic information about the new custodian, a report on the escrow business, and a newly notarized power attorney, and shall submit a formal escrow agreement within 5 working days after the date on which the foreign exchange account and the special RMB account are opened.
Article 22 The custodian shall submit the relevant reports on remittance/exchange of funds and domestic securities investments by the QFII in a timely and accurate manner according to the following particulars:
1) Completing the Schedule of QFIIs Funds Outward/Inward Remittances (See Attachment 2 for a sample) within 2 working days after the QFIIs outward/inward remittances of funds or settlement/purchase of exchange;
2) Submitting the Monthly Report I & II on Domestic Securities Investment by the QFIIwithin 8 working days after the end of each calendar month;
3) Submitting the last fiscal years Annual Financial Statements I & II on Domestic Securities Investments by QFIIs(see Attachment 4 for a sample) as audited by a Chinese certified public accountant within 3 months after the termination of each fiscal year.
Article 23 A QFII that commits one of the following acts shall be subject to punishment by the AFE in accordance with the Regulations of the People's Republic of China on Foreign Exchange Administration, and the investment quota thereof may be reduced or revoked:
1) Illegal use of foreign exchange, such as transferring or selling the investment quota.
2) Providing false information or materials to its custodian or the AFE.
3) Failing to process the exchange settlement or exchange purchase/payment in accordance with the relevant regulations.
4) Failing to provide relevant information or materials regarding its remittance/exchange of funds and domestic securities investments as required by the AFE
5) Other acts in breach of the regulations on foreign exchange administration.
Article 24 Custodians that commit one of the following acts shall be subject to punishment by the AFE in accordance with the Regulations of the People's Republic of China on Foreign Exchange Administration; in serious cases, its qualification as QFII custodian shall be revoked jointly by the AFE and CSRC:
1) The outward remittance of the principal for the QFII exceeds the SAFE-approved investment quota or is overdue;
2) Failure to go through the procedures for the outward remittance of principal/proceeds for the QFII in accordance with the relevant regulations;
3) Failure to open/close the foreign exchange accounts and special RMB accounts for the QFII in accordance with the relevant regulations, or failure to go through the remittance/exchange of funds and transfer procedures for the QFII for the prescribed income and range of expenditures for the account;
4) Failure to submit reports or relevant materials to the AFE, or failure to report on relevant situations to the AFE.
5) Failure to report the balance of payments in accordance with the relevant regulations;
6) Other acts in breach of the regulations on foreign exchange administration.
Chapter 6 Supplementary Provisions
Article 25 The materials submitted to the AFE as required by these Regulations shall be in Chinese. Should there be counterparts in both Chinese and a foreign language, the Chinese text shall prevail.
Article 26 Power to interpret the present Regulations shall remain with the SAFE.
Article 27 These Regulations will enter into force as of the date of promulgation. The Provisional Measures for Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII) (Announcement No. 2 [2002] of the SAFE) and the Circular of the General Affairs Department of the State Administration of Foreign Exchange on the Management and Operation of Foreign Exchange of QFIIs (Huizongfa No. 124 [2003]) shall be repealed.

Attachments: (Omitted)

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