After securing final approval on March 14 to act as custodians for foreign institutions by China's Security and Regulatory Commission (CSRC) and the State Administration for Foreign Exchange (Safe), custodian banks Standard Chartered, HSBC and Citibank have already fielded applications for clients requesting qualified foreign institutional investor (QFII) status, according to bank officials.
These institutions would compete to invest in China's newly opened $500 billion Class A share market.
As previously reported (Securities Industry News, Jan. 20), the new law allowing foreign investors to become QFIIs--through their agent banks, who must take on a QFII custodian license--went into effect Dec. 1. Previously, offshore investors were restricted to Class B shares on Mainland China, and H and N shares listed on the Hong Kong and New York stock exchanges, respectively.
While not releasing the number of applicants or their identities, banks confirm that they are lodging submissions with the regulators, with Citibank claiming to have submitted its first QFII application just 
one week after the bank was granted custody approval. "Citibank has worked with clients in preparing QFII documentation and is now submitting QFII applications to the CSRC on behalf of our clients," said Richard Ernesti, regional head of Citibank Global Securities Services.
"The CSRC has confirmed they have quite a few applications," said James Wong, SVP of custody and clearing at HSBC, declining further comment on HSBC-sponsored applicants.
For its part, Standard Chartered Bank is in discussion with a "number of prospects," regarding QFII applications, according to Y.F. Cheung, head of custody and clearing services for Hong Kong and China at the bank.
Cheung expects demand to be high for high-quality A shares listed in China, despite the premium compared to H shares and the restrictions placed on dividends and capital gains. "Counters likely to be in demand include heavy industrials and other sought-after instruments like Treasury bonds not available outside Mainland China," he said.
Regulations require that potential QFIIs must mandate domestic commercial banks and broker-dealers, respectively, for custody and trading arrangements. To qualify for QFII status, fund managers, insurance and securities companies, commercial banks and other institutions may apply, they must have a minimum of $10 billion in funds under management and banks also must be among the world's "top 100 ranked by total assets," according to regulators.
QFIIs may invest in A shares listed on China's stock exchanges, as well as listed Treasuries, bonds and other financial instruments, but holdings by each QFII cannot exceed 10 percent of the total outstanding shares in a particular company, and neither can the total of combined QFII holdings exceed 20 percent of the shares in a company. This means that QFIIs must compete for available securities quotas.
To this end, a QFII will mandate that its custodian apply for a securities investment license and open a Renminbi settlement account (RMB account). Within three months of receiving that license, the QFII must transfer hard currency to cover its quota, which is converted to local currency and held in its custodian account. Failure to transfer funds by the due date means the quota could be reallocated and the QFII must reapply.
In an effort to encourage long-term investment and balance currency holdings, regulations also apply to the repatriation of funds when offshore institutions wish to reduce or exit Class A holdings.
After 12 months, most QFII's can, via their custodians, apply to Safe for foreign exchange to repatriate their investment in installments of not more than 20 percent at a time, with intervals of three months between each installment. In the case of less liquid closed-end funds, institutions must maintain holdings for three years before applying to Safe for hard currency, which again may not exceed 20 percent in each installment, with intervals of one month each. It's noteworthy that in both cases, Safe may adjust the time required to repatriate investment principal and dividends "subject to the needs of China's foreign exchange balance." Despite this and sector-based restrictions, there remains at this time no shortage of applicants, as China's domestic A-share market opens investment to foreign institutions.
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