Market Practice Report

Transcription

1 [Type text] makr Market Practice Report China December 2017

2 Table of Contents Quick IntelliViews Country Data Workweek and Time Zone Regulatory Structure Legislation Regulators Investment Restrictions Ownership Limitations Disclosure Requirements Reporting Authority Disclosure Process Disclosure Time Frame Filing Entity Monitoring Process for Ownership Disclosure Penalty Description Aggregation Description Market Profile Security Types Money-market Instruments Government Instruments Corporate Debt Instruments Equity Instruments Depositary Receipts Other Financial Instruments Security Exchanges Trade Execution Trading Method Trading Hours Board Lots Securities Identification Fees Costs, and Commissions Turnaround Trading Short Selling Securities Lending Settlement and Clearance Clearinghouse, Central Depository, and Central Registrar Overview US Rule 17f-7 Compliance Security Form Participation Settlement

3 2 Settlement Period Prematching Netting Same-day Funds Settlement Process and DVP Issues Registration Registration Period Process Restrictions on Sale and Settlement During Registration Registration in Nominee Versus Beneficial Owner s Name and Title Mandatory for Foreign Investors Fails, Penalties, and Buy-ins Buy-ins Fails and Penalties Guarantee Funds Corporate Events Corporate Actions Types Notification and Distribution Process Dividends Interest Shareholder Governance Notification Process Voting Process Blocking Shareholder Recognition Taxation Rates Transaction Tax Stamp Tax Value-added Tax (VAT) Withholding Taxes Capital Gains Tax Withholding Process Double Taxation Avoidance Treaties Foreign Exchange Currency Trading Inward Remittance Outward Remittance Glossary... 90

4 Brown Brothers Harriman, 2017 December 2017 The above information does not constitute legal, tax, financial or investment advice and is not intended as: (i) an offer to sell or a solicitation to buy securities or investment products, (ii) an offer of services, or (iii) a recommendation to invest or not invest in any country. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information: (i) has been obtained from sources believed to be reliable, (ii) has not been independently verified, and (iii) is inherently subject to change. BBH does not make any representation or warranty as to the accuracy or completeness of the information provided and will not be responsible for any loss or damage (direct, indirect or consequential) incurred as a result of any reliance on this information. Any information provided and/or opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. Clients should seek the advice of their own compliance or legal counsel, and form their own views. BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. Brown Brothers Harriman & Co All rights reserved. 3

5 Quick IntelliViews QUICKINTELLIVIEWS CHINA -ACCOUNT OPENING/INVESTMENT APPROVAL- EQUITIES Equities Subcustodian Account Opening Time Frame R/QFII scheme: 4 to 12 months; "B" shares: 1 week Documents Required Separate securities accounts required for different instruments Multiple cash accounts required Prior Investment Approval Required Approval From Yes Yes - A shares and B shares are held through separate securities accounts. Yes - Separate cash accounts are required for investments made under R/QFII scheme and the B- share market. Yes R/QFII scheme: China Securities Regulatory Commission (CSRC), China Securities Depository and Clearing Company Limited (CSDCC) and State Administration of Foreign Exchange (SAFE) Approximate Time Frame R/QFII scheme: 3 to 8 months; "B" shares: 3 to 5 days 4

6 Estimated Costs "B" shares: CSDCC Shenzhen - HKD 580, CSDCC Shanghai - USD 85 R/QFII scheme: "A" shares: CSDCC Shanghai - RMB 400, CSDCC Shenzhen - RMB 400 Other Approvals Required (instrument or sectors) Approval From Approximate Time Frame Estimated Costs Special RMB account: RMB 300 No Not Applicable Not Applicable Not Applicable 5

7 QUICKINTELLIVIEWS CHINA -ACCOUNT OPENING/INVESTMENT APPROVAL- Separate accounts required: FIXED INCOME Treasury Bills Government Bonds Corporate Bonds Securities Yes Yes Yes Cash Yes Yes Yes Timeframe to open separate cash and/or securities accounts Prior Investment Approval Required If yes, by whom 2 to 3 weeks Yes Must acquire R/QFII Or PBOC Direct Scheme approval Approximate Time Frame 2 to 3 months Investor Requirements for Trading If yes, Type of Requirement Not Applicable Not Applicable 2 to 3 weeks 2 to 3 weeks Yes Must acquire R/QFII Or PBOC Direct Scheme approval 2 to 3 months Yes R/QFII Investor ID Or PBOC Direct Scheme approval Yes Must acquire R/QFII Or PBOC Direct Scheme approval 2 to 3 months Yes R/QFII Investor ID Or PBOC Direct Scheme approval 6

8 QUICKINTELLIVIEWS CHINA -MARKET INFRASTRUCTURE- EQUITIES Financial Markets Regulatory Body Central Bank Main Stock Exchange Regulated Over-the-Counter (OTC) Market Central Securities Depository Equities China Securities Regulatory Commission (CSRC) People s Bank of China (PBOC) Shanghai Stock Exchange (SSE) No China Securities Depository and Clearing Company Limited (CSDCC), China Central Depository and Clearing Company (CCDC) and Shanghai Clearing House (SCH) 7

9 QUICKINTELLIVIEWS CHINA -INVESTMENT CHARACTERISTICS- Tenors Issuer Currency Denomination Coupon or Discount FIXED INCOME Treasury Bills Not Applicable Not Applicable Not Applicable Not Applicable Government Bonds 3 months to 30 years Ministry of Finance People's Republic of China (MOF) Chinese yuan (CNY) (also referred to as Chinese renminbi (RMB)) Coupon Corporate Bonds More than 1 year Issuing Company Chinese yuan (CNY) (also referred to as Chinese renminbi (RMB)) Determined by issuer Form (Book-entry/Physical) Not Applicable Book-entry Book-entry Interest Payment Period How many days after maturity is interest paid Not Applicable Not Applicable Semiannually and annually Upon maturity Semi-annually and annually Upon maturity 8

10 QUICKINTELLIVIEWS CHINA -INVESTMENT RESTRICTIONS- FIXED INCOME Treasury Bills Government Bonds Corporate Bonds Available to Foreign Investors Yes Yes Yes If no, restriction type Acquisition Restrictions Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable 9

11 QUICKINTELLIVIEWS CHINA -SHAREHOLDER DISCLOSURE REPORTING- Reporting Authority Disclosure Reporting Threshold Subsequent Reporting EQUITIES Equities China Securities Regulatory Commission (CSRC), Issuing Company and Stock Exchange 5 percent Yes Disclosure Reporting Time Frame Trade Date plus 3 Method for Disclosure Reporting Mail Reporting Considerations Reporting Of Affiliated/Related Persons Provisions Reporting of Convertible Instruments Required Yes Yes 10

12 QUICKINTELLIVIEWS CHINA -FOREIGN OWNERSHIP LIMITS- EQUITIES Restriction Market Foreign Ownership Limits Sector Ownership Limitations Monitoring & Implications Where Limits Monitored Implications for Limit Breaches Rectification Options Rectification Time Frame Equities Over-the-counter transactions R/QFII scheme: Individual - 10% Aggregate - 30% R/QFII scheme: restricted sectors pending B-share market: gold mining, defense industries do not issue B shares Shanghai Stock Exchange (SSE) Shenzhen Stock Exchange (SZSE) Forced sale Divestment or forced sale Up to 5 business days 11

13 QUICKINTELLIVIEWS CHINA -TRADING- EQUITIES Investor Requirements for Trading Type of Requirement Trading Details Trading Days Trading Hours Pre-opening Session After Hours Session Trading Suspension Circuit Breaker Mechanisms Price Fluctuation Limits Trading Characteristics Board Lots Block Trading Short Selling Securities Lending Turnaround Trades Odd Lots Equities Yes R/QFII scheme: Securities investment license B-share market: Investor ID Monday through Friday 9:30 a.m. to 11:30 a.m. and 1:00 p.m. to 3:00 p.m. 9:15 a.m. to 9:25 a.m. 3:00 p.m. to 3:30 p.m. Yes (+/-) 5 and 10 percent of previous day's closing price Yes Yes No No Allowed for bonds and warrants only Yes 12

14 QUICKINTELLIVIEWS CHINA -TRADING- Trading Characteristics Primary Market: FIXED INCOME Treasury Bills Government Bonds Corporate Bonds Primary Dealers Not Applicable Yes Yes Auction Style Not Applicable Dutch and American style Frequency of Auction Not Applicable Bi-weekly Auction Agent Bid Types Not Applicable Not Applicable China Government Securities Depository Trust & Clearing Co. Ltd. Competitive and noncompetitive Determined by issuer Determined by issuer Determined by issuer Determined by issuer 13

15 Can bids be cancelled Not Applicable No Determined by issuer Secondary Market: Method of Trading Not Applicable Shanghai Stock Exchange (SSE), and Shenzhen Stock Exchange (SZSE) Shanghai Stock Exchange (SSE), and Shenzhen Stock Exchange (SZSE) Trading entities Not Applicable Banks, merchant banks and stockbroking firms Banks, merchant banks and stockbroking firms Trading Days Not Applicable Monday to Friday Monday to Friday Trading Hours Not Applicable SSE: 9:15 a.m. to 11:30 a.m. and 1:00 p.m. to 3:00 p.m. local time SZSE: 9:15 a.m. to 11:30 a.m. and 1:00 p.m. to 2:57 p.m. local time SSE: 9:15 a.m. to 11:30 a.m. and 1:00 p.m. to 3:00 p.m. local time SZSE: 9:15 a.m. to 11:30 a.m. and 1:00 p.m. to 2:57 p.m. local time Securities Lending Not Applicable Yes Yes Turnaround Trades Not Applicable Yes Yes Short Selling Not Applicable No No 14

16 QUICKINTELLIVIEWS CHINA -SETTLEMENTS- EQUITIES Settlement Cycle Form of Settlement (Bookentry/Physical) Partial Settlements Free-of-Payment (FoP) Transfers Allowed Interbroker Settlement Details (Direct Participants) Central Counterparty/Guarantor Securities Netting Cash Netting Settlement Finality Client Settlement Details (Indirect Participants) Delivery-versus-Payment (DVP) Affirmation of Transaction Deadline for Affirmation of Transaction Securities Netting Equities R/QFII scheme: Trade Date (T)+0 for securities; T+1 for cash B-share market: Trade Date (T) + 3 Book-entry No Yes (B-share market only) China Securities Depository and Clearing Company Limited (CSDCC) Yes (B-share market only) Yes Upon settlement of securities R/QFII scheme on-exchange: No R/QFII CIBM: Yes B-share market: Yes Yes (B-share market only) B-share market: Trade Date (T)+2 at 12:00 p.m. No 15

17 Cash Netting Entity Effecting Movements Settlement Finality Investor Protection Mechanisms Buy-ins/Sell-outs Fail Penalties Guarantee/Settlement Funds QFII scheme: Yes B-share market: Yes China Securities Depository and Clearing Company Limited (CSDCC), China Central Depository and Clearing Company (CCDC), Shanghai Clearing House (SCH) Upon settlement of securities R/QFII scheme: No B-share market: Yes R/QFII scheme: Yes B-share market: Yes Yes 16

18 QUICKINTELLIVIEWS CHINA -SETTLEMENTS- FIXED INCOME Treasury Bills Government Bonds Corporate Bonds Settlement Characteristics: Settlement Cycle Primary Market: Securities settle T+0, while cash settles T+1 Secondary Market: Securities settle T+0, while cash settles T+1 for onexchange, T+0 / T+1 / T+2 for CIBM Primary Market: Securities settle T+0, while cash settles T+1 Secondary Market: Securities settle T+0, while cash settles T+1 for onexchange, T+0 / T+1 / T+2 for CIBM Primary Market: Determined by issuer Secondary Market: Securities settle T+0, while cash settles T+1 for onexchange, T+0 / T+1 / T+2 for CIBM 17

19 18 Entity effecting cash movement Primary Market: People s Bank of China (PBOC) Secondary Market: China Securities Depository and Clearing Company Limited (CSDCC), China Central Depository and Clearing Company (CCDC), Shanghai Clearing House (SCH) Primary Market: People s Bank of China (PBOC) Secondary Market: China Securities Depository and Clearing Company Limited (CSDCC), China Central Depository and Clearing Company (CCDC), Shanghai Clearing House (SCH) Primary Market: China Securities Depository and Clearing Company Limited (CSDCC) Secondary Market: China Securities Depository and Clearing Company Limited (CSDCC), China Central Depository and Clearing Company (CCDC), Shanghai Clearing House (SCH) Entity effecting securities movement Primary Market: China Securities Depository and Clearing Company Limited (CSDCC), Primary Market: China Securities Depository and Clearing Company Limited Primary Market: China Securities Depository and Clearing Company Limited

20 19 China Central Depository and Clearing Company (CCDC), Shanghai Clearing House (SCH) Secondary Market: China Securities Depository and Clearing Company Limited (CSDCC), China Central Depository and Clearing Company (CCDC), Shanghai Clearing House (SCH) (CSDCC), China Central Depository and Clearing Company (CCDC), Shanghai Clearing House (SCH) Secondary Market: China Securities Depository and Clearing Company Limited (CSDCC), China Central Depository and Clearing Company (CCDC), Shanghai Clearing House (SCH) (CSDCC), China Central Depository and Clearing Company (CCDC), Shanghai Clearing House (SCH) Secondary Market: China Securities Depository and Clearing Company Limited (CSDCC), China Central Depository and Clearing Company (CCDC), Shanghai Clearing House (SCH) Central Counterparty/Guarantor China Securities Depository and Clearing Company Limited (CSDCC) if China Securities Depository and Clearing Company Limited China Securities Depository and Clearing Company Limited

21 traded on0exchange (CSDCC) if traded onexchange (CSDCC) if traded onexchange Securities Netting No No No Cash Netting Yes Yes Yes Partial Settlement No No No Settlement Finality Upon trade execution Upon trade execution Upon trade execution Free of Payment No No No 20

22 QUICKINTELLIVIEWS CHINA -CORPORATE ACTIONS- EQUITIES Company Announcements Regulated Event Date Recognition Ex Date (Ex) Record Date (RD) Pay Date (PD) Equities Yes "A" Shares - RD+1 "B" Shares - RD-2 "A" Shares Ex-1 "B" Shares - Ex+2 B Shares for bonus issue RD+1 (Shenzhen) and RD+2 (Shanghai) B Shares for cash dividends Normally is RD+1 (Shenzhen) and varies by company for Shanghai A Shares for bonus issues RD+1 (Shenzhen) and RD+2 (Shanghai) A Shares for rights issues RD+1 A Shares for dividends RD+1 21

23 Entitlement Based On Formal Market Claims Available Settled position on Record Date (RD) No 22

24 QUICKINTELLIVIEWS CHINA -PROXY VOTING- EQUITIES Peak Proxy Season Meeting Announcement Period Meeting Results Announced Voting Details Positions Eligible to Vote Partial Voting Allowed Split Voting Allowed Voting Method Special Requirements Documentation Required Share Blocking Equities April to July 30 Days before annual general meeting (AGM) Yes Registered Shareholders Yes Yes Physical presence / Proxy cards Yes Yes 23

25 QUICKINTELLIVIEWS CHINA -CASH, CASH PAYMENT SYSTEMS & FOREIGN EXCHANGE- EQUITIES Local Currency Overdrafts Interbank Payment Systems Operated By Instruction Method Transfer Mechanism Finality & Irrevocability Foreign Exchange Freely Traded Contract Limitations Foreign Exchange Controls Restrictions Repatriation Restrictions Equities Chinese yuan (CNY) (also referred to as Chinese renminbi (RMB)) No People's Bank of China (PBOC) Electronic Batch Upon credit to the beneficiary's account No Yes Yes Yes 24

26 QUICKINTELLIVIEWS CHINA -TAXATION- FIXED INCOME Treasury Bills Government Bonds Corporate Bonds Transaction Tax Not Applicable Not Applicable Not Applicable Stamp Duty Not Applicable Not Applicable Not Applicable Value-Added Tax Not Applicable Not Applicable Not Applicable Any other taxes Not Applicable Not Applicable Not Applicable If yes, type of tax Not Applicable Not Applicable Not Applicable 25

27 1. Country Data Workweek and Time Zone The standard workweek is Monday through Friday, from 9:00 a.m. to 5:00 p.m. local time. China is 12 hours ahead of Eastern Standard Time (EST). 26

28 2. Regulatory Structure Legislation Laws governing investment include, but are not limited to, the following: Interim Regulations on Share Issuing and Trading of April 1993 Provides the legal framework for trading and settlement of listed securities, application and allocation of initial public offerings, and provides rules governing information disclosure. Regulations on Listing of Foreign Investment Shares of May 1996 Established national legislation covering B share activities in the Shanghai and Shenzhen markets. Foreign Exchange Provisions of June 1996 Permits local issuing companies to purchase foreign currencies for payment of dividend income to foreign investors. Regulations of the State Council on Domestically-Listed Foreign Capital Shares of Joint Stock Companies Outlines requirements for B share listing and the application process. China Securities Law of December 1998 as amended January 1, 2006 Unified the rules and regulations for trading and settlement of listed shares, disclosure requirements, penalties, etc. Provisional Measures on Administration of Domestic Securities Investments of Qualified Foreign Institutional Investors (QFII) Decree No. 12 of December 2002 as amended August 25, 2006 Provides the governing framework for QFII s investment in China s domestic market. It covers general guideline on the qualification criteria for application, registration options, investment products available to QFIIs, disclosure requirements and grants authority to the CSRC to apply sanctions in the event the QFII violates any regulations. Circular on Relevant Issues Concerning Implementation of the Measures on the Administration of the Domestic Securities Investment of Qualified Foreign Institutional Investors of December 2002 as amended on August 25, 2006 Provides implementation rules governing QFII requirements in terms of scale of assets, investment options available to QFIIs, account structure at the China Securities Depository Clearing Corporation (CSDCC) Provisional Regulations on Foreign Exchange Administration of Domestic Securities Investments of Qualified Foreign Institutional Investors of December 2002 as amended in December 2012 Outlines application procedures and remittance and repatriation practices for QFIIs. Measures on the Administration of Clearing Reserve Fund 27

29 28 Require QFIIs to contribute to Clearing Reserve Fund. Administrative Measures on Futures Exchanges and Administrative Rules on Futures Company of May 2007 (The Rules) Rules released by CSRC covering futures markets. It provides the basis for the establishment of the futures market as well as regulatory provisions to ensure the protection of investors. Circular on Relevant Issues Concerning Implementation of the Measures on the Administration of the Domestic Securities Investment of QFIIs Issued July 2012, Article 7 of the revised Circular provides the amended guidelines for QFIIs securities account structures; most notably expanding the types of accounts which may be opened by QFIIs. People s Bank of China Circular No. 183/2012 Issued August 2012, clarifies the RMB cash account structure for QFIIs, and issues the guidelines for establishing special RMB accounts, most notably, enabling QFIIs to open multiple RMB accounts for purposes of securities investment and indexed futures trading. PBOC Circular on the Relevant Issues of Qualified Foreign Institutional Investors ( QFIIs ) Investing in China Interbank Bond Market (CIBM) - Administration Measures on Bond Trading in the Interbank Bond Market Administration Measures on the Registration, Custody and Settlement of Bonds in the Interbank Bond Market China Foreign Exchange Trade System (CFETS) Bond Trading Rules in Interbank Market China Central Depository and Clearing Co (CCDC) Bond Trading and Settlement Rules State Administration of Foreign Exchange (SAFE) Provision on Foreign Exchange Administration of Domestic Securities Investment by Qualified Foreign Institutional Investors (QFII) State Administration of Foreign Exchange (SAFE) Circular of the People s Bank of China and State Administration of Foreign Exchange on Relevant Issues Concerning Investment in Domestic Securities by RMB Qualified Foreign Institutional Investors (RQFII)

30 Regulators State Council PBOC CBRC CSRC SAFE Banks CSRC Branches CSDCC Shanghi Stock Exchange Shenzhen Stock Exchange CSDCC Shenzhen Branch CSDCC Shanghai Branch The Securities Committee of the State Council (SC), which was established in 1992, oversees the China Securities Regulatory Commission (CSRC), and is the primary security market regulator. The CSRC is responsible for regulating the securities market and governs the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE), as well as the Central Securities Depository and Clearing Company Ltd. (CSDCC). The CSRC oversees the Investor Protection Bureau (IPB), whose primary responsibilities include the drafting and review of regulations pertaining to investor protection, as well as providing investor education on the legal complexities of the financial markets. Additionally, the CSRC jointly has oversight of Qualified Foreign Institutional Investors (QFIIs) with SAFE. The CSRC maintains local branch offices, which work in direct conjunction with the central CSRC office in Beijing. The primary responsibilities of the CSRC include: issuing regulations relating to the supervision of the securities markets; implementing the policies and guidelines provided by the SCSC; regulating the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE), and their respective clearing, depository, and registrar companies; supervising brokers, underwriters, investment advisors, and the activities of issuing companies and securities institutions; 29

31 monitoring stock exchange activity through online systems, investigating potential market rule violations or manipulations, penalizing market participants, and forwarding potential criminal offenses to the court system; and performing annual audits of all brokers. The People s Bank of China (PBOC), the central bank, is mainly responsible for formulating and implementing monetary policies, issuing the local currency and managing its circulation as well as operating the state treasury. The State Administration of Foreign Exchange (SAFE) which is a department of the PBOC, is responsible for the management of foreign exchange in the market. Although SAFE does not regulate banks, they are required to provide foreign exchange quota and repatriation reporting on behalf of Qualified Foreign Institutional Investors (R/QFIIs) to SAFE. The China Banking Regulatory Commission (CBRC) began operations on April 28, The CBRC is the main regulator of the banking sector. In its role, the CBRC devises rules and regulations for banks and has the authority to grant a new banking license, suspend or terminate activities of a bank. 30

32 Foreign Investor Market Entry Approval and Registration Process B-Share Market No regulatory approval is required for foreign investors to invest in the B-share market in China. However, foreign investors are required to obtain investor codes for Shanghai and/or Shenzhen prior to investing in each respective market. The investor codes are issued by the China Securities Depository and Clearing Corporation Ltd. (CSDCC) Shanghai and Shenzhen branches. The codes are obtained through the depositories clearing participants (i.e., the subcustodian) and must be quoted to the broker when executing a trade and be included on all settlement instructions. The following documentation is required to be submitted to open an account: Certificate of Incorporation or other document with Taxpayer ID notarized as certified true copy Application Form Authorized Signatory List (ASL) notarized as certified true copy Qualified Foreign Institutional (QFII) Scheme (A-Share Market) Foreign investors are required to obtain a securities investment license and relevant approvals from the appropriate authorities prior to investing in the A-share and fixed-income markets under the QFII scheme. QFII approval involves 5 sequential applications/and approvals. The first approval must be received prior to the submission of the next approval. Securities Investment Business License from CSRC Foreign Exchange Registration Certificate (FERC) also known as investment quota from SAFE SAFE approval for special Chinese renminbi (RMB) account Approval to open RMB Basic Account and RMB Special Account from PBOC (if applicable, approval from PBOC of investing in China Interbank Bond Market) Establishment of foreign currency account linked to RMB account Apply for Investor ID code from CSDCC Shanghai and Shenzhen branches (these are reported to the stock exchanges) o For trading on China Interbank Bond Market (CIBM), account opening at China Central Depository and Clearing Co. (CCDC), followed by obtaining approval from China Foreign Exchange Trading System (CFETS) Account opening at subcustodian Multiple Securities Accounts: 31

33 QFIIs are eligible to open multiple securities accounts which do not need to be linked to a RMB cash account as approved by SAFE. QFIIs can open separate securities accounts for proprietary assets and client assets. o QFIIs are permitted to open securities account for the underlying clients in the name of "QFII + Client Name" that will separate assets for specific clients from proprietary assets of the QFII and local custodian. The assets in the client account will belong to the client and not the QFII. o QFII are permitted to open securities accounts for the long term funds they manage (such as public funds, insurance funds, pension funds, charity funds and endowment funds). The account can be opened in the name of QFII + Client Fund", and such assets will belong to the Fund. Domestic fund management companies can provide asset management services to QFIIs, and specific accounts can be opened for such investments. The scope of investments must comply with the rules governing QFIIs. QFIIs will be eligible to appoint up to three local brokers per stock exchange for securities trading. However, QFIIs need to sell securities through the same broker the securities were purchased from. To support trading through multiple brokers, the QFII will need to have separate securities accounts. QFII rules introduce the foreign currency account and stipulate it is to be opened based on SAFE s approval. SAFE informs the QFII to establish a foreign currency account within the approval letter granted for investment quota. The foreign currency account is linked to the special RMB account and a basic account. A QFII can open multiple foreign currency accounts with the custodian bank in USD, Euro (EUR), Japanese yen (JPY), Hong Kong dollar (HKD) or British pound sterling (GBP). QFIIs are required to open one basic RMB deposit account. The funding associated with securities investments cannot be deposited in this account. A special RMB deposit account is required for securities trading. QFIIs may establish special RMB accounts for their proprietary accounts and separate accounts for the QFII's clients assets. A separate special foreign currency account is required for each RMB account opened. QFIIs are allowed to open multiple special RMB cash accounts to support investments in stock index futures and instruments traded via the China Interbank Bond Market (CIBM). Multiple Special RMB Accounts: QFIIs that elect to operate client assets accounts (known as QFII+Client Name account), the QFII will be permitted to open up to six Special RMB accounts and one foreign currency (FCY) account per each securities accounts. If the QFII's account is designated as proprietary, the QFII can open one FCY account and one corresponding special RMB cash account. QFIIs cannot open multiple special RMB cash accounts for proprietary assets. 32

34 QFIIs that have been granted open-ended China fund status per the approvals from the CSRC and SAFE (known as QFII+Fund account) may open one FCY account and one corresponding special RMB cash account per fund. Transfer of funds between different FCY and special RMB cash accounts is not permitted. Eligible Institutions and Qualification Requirements There are strict requirements for determining eligible institutions for the QFII scheme. QFII applicant must be domiciled in a jurisdiction where there is a well-defined regulatory system, and where the regulator has signed a Memorandum of Understanding with the CSRC. Eligible QFII applicants include overseas fund management institutions, insurance companies, securities companies, commercial banks, asset management companies, government investment companies, pension funds, charitable foundations, endowment foundations, trust companies and other long-term funds. Applicants must be able to meet the following eligibility requirements: Organization Status Comply with the standards set forth by its country of domicile for internal control requirements, risk management standards, and employee qualifications Must have no history of enforcement action taken against it within the past three years Capital Requirement Asset Management Institutions Must have been in operation for at least 2 years Must have managed a minimum of USD 500 million in securities assets during the last financial year Securities Companies Must have been in operation for at least 5 years 33

35 Must have net assets of at least USD 500 million Must have managed a minimum of USD 5 billion in securities assets during the last financial year Insurance Companies Must have been in operation for at least 2 years Must have managed a minimum of USD 500 million in securities assets during the last financial year Other Institutional Investors (Pension funds, Charitable foundations, Endowment foundations, Trust companies, Government Investment Management companies) Must have been in operation for at least 2 years Must have managed a minimum of USD 500 million in assets during the last financial year Commercial Banks At least 10 years of operating history with AUM of at least USD 5 billion in the latest fiscal years. Must have Tier 1, paid-in 34

36 capital of at least USD 300 million. In order to invest in CIBM market, R/QFIIs need to apply for the CIBM approval and quota from PBOC and then appoint an interbank bond market settlement agent with international clearing capacity for trading and settlement. The bond market settlement agent and QFII appointed local custodian bank need to be the same bank. Foreign investors categorized as sovereign wealth funds or other types of foreign government institutions can apply for any amount of quota. These types of entities do not also need to hold an R/QFII license in order to access the CIBM market and can appoint the PBoC as custodian bank. Renminbi Qualified Foreign Institutional Investor (RQFII) Scheme The CSRC, PBOC, and the SAFE issued regulations and guidelines for the introduction of the Chinese renminbi (RMB) QFII scheme (RQFII Scheme). The scheme first granted Hong Kong subsidiaries of qualified Chinese fund management securities companies, commercial banks and insurance companies, and financial institutions registered and with primary business operating in Hong Kong the ability to reinvest RMB raised in Hong Kong in the China A share market. Entities eligible to apply for participation in the RQFII Scheme are those that have a asset management license issued by the Securities and Futures Commission (SFC) in Hong Kong, and must submit an investment plan, audited financial statements, and a RQFII application form to the CSRC for approval. Regulators are gradually allowing additional domiciles to join the RQFII scheme including qualified investors in Chile, Luxembourg, Singapore, United Kingdom, France, Korea, Germany, Qatar, Canada, Thailand, Malaysia, Hungary, the United Arab Emirates and Australia, Switzerland, United States and Ireland to participate in RQFII. Similar to QFIIs, approved RQFIIs will need to appoint and enter into a custody agreement with a local custodian bank authorized to conduct custodian services. The RQFII may only open one custody account at the CSDCC Shanghai and Shenzhen for each RMB cash account approved by the SAFE. Eligible applicants first need to apply to the CSRC for a RQFII Investment License and to SAFE for an Investment Quota and Account Opening approval. Once that is complete, the applicant then must apply to the PBOC for approval if it would like to invest in the China Interbank Bond Market (CIBM). 35

37 The eligible instruments for investment under the RQFII scheme are as follows: shares, bonds and warrants listed or transferred in the Stock Exchange, fixed income products traded on the InterBank Bond Market, securities investment funds, index futures and other instruments as permitted by the CSRC. RQFIIs can participate in the subscription of stocks initial public offering (IPO), subscription of convertible bonds IPOs, additional offering and rights issues. CSRC removed the restriction on the asset allocation; RQFIIs can determine the product type in accordance with market demand/conditions. RQFIIs are permitted to appoint up to three local custodians. If more than one local custodian is to be utilized, one of the custodians must be appointed as the RQFII Master Reporting Bank. The RQFII Master Reporting Bank will manage RQFII s communication and reporting to SAFE during the account opening and quota management process. It will be responsible for quota application, quota transfer and reallocation application, quota injection extension filing, RQFII institution information registration, RQFII products information registration and other tasks on behalf of the RQFII. China Interbank Bond Market Direct (CIBM) The People's Bank of China (PBOC) expanded the scope of eligible foreign investors for direct access to the China Interbank Bond Market (CIBM). The PBOC direct program facilitates investments on the CIBM without the requirement to obtain a Q/RFII license. These investors do not have access to fixed income listed on the Shanghai or Shenzhen exchanges (or any other products listed on the exchanges). Previously, the PBOC direct access program was limited to foreign investors classified as central banks, sovereign wealth funds and international financial organizations. Investors are broadly classified as Type I or Type II: Type I: o Central banks, monetary authorities, international financial organizations and sovereign wealth funds. Type II: o Q/RQFII are also eligible; however, these investors remain subject to all QFII and RQFII regulations o Insurance companies, fund management companies, asset managers, commercial banks, securities companies, pension funds, endowments may access the CIBM via the PBOC Direct Scheme which does not require a QFII or RQFII license 36

38 o PBOC may also deem other types of long term investor as eligible to access the CIBM at its discretion o Eligible entities must be domiciled outside China; however, those investors domiciled in Hong Kong, Macau and Taiwan are eligible o RMB clearing banks in Hong Kong SAR and Macau SAR and offshore RMB crossborder trade settlement banks The key differences between Type I and Type II investors are as follows: o Type I investors file investment registration documentation directly with the PBOC Beijing which registers the investment approval within 10 business days. Type II investors file investment registration documentation with the PBOC Shanghai which registers the investment approval within 20 business days. o Type I investors may appoint either the PBOC or a licensed settlement bank (i.e. subcustodian) as a bond settlement agent. Type II investors may only appoint a licensed settlement bank as a bond settlement agent. o Eligible securities applicable to Type I and Type 2 investors are slightly different. Investors will be required to complete the PBOC registration form in order to gain access to the CIBM and will not be required to apply for quota. Instead, eligible investors will declare to the PBOC how much quota the entity wishes to utilize. It is not yet clear if there will be a minimum or maximum amount of quota that investors will be permitted to utilize. The PBOC will review all filing forms and issue a registration notice within 20 business days of receiving a completed set of filing documentation. The investor will then be required to establish trading and depository accounts within three months of receiving the registration notice. Investors will be required to establish a relationship with a bond settlement agent. Bond settlement agents may also act as custodian to the investments acquired via the program. Investors will only be permitted to establish a relationship with a single bond settlement agent. Investors will be permitted to change bond settlement agents following submission of the appropriate documentation. Time Frame B Share Market Account opening takes approximately one to two weeks once the executed documents are received in the local market. QFII and RQFII Schemes 37

39 The application process for the these schemes is highly regulated and requires extensive documentation. Regulatory approval and account opening may take six to twelve months or longer. China Interbank Bond Market Direct (CIBM) Regulatory approval and account opening may take approximately one to two month or longer. The PBOC will approve the applicant within 20 business days upon receipt of the documentation. Once the approval is granted the account opening process at the PBOC, CCDC, SCH and CFETS will take approximately two to three weeks. Costs B Share Market The B-share market, the CSDCC Shenzhen charges approximately Hong Kong dollar (HKD) 580 for account opening and the CSDCC Shanghai assesses an account opening fee of US dollar (USD) There is also an annual account maintenance fee of USD 20 charged by the CSDCC Shanghai and HKD 10 by the CSDCC Shenzhen. QFII RQFII Schemes and CIBM Direct Schemes The CSDCC Shanghai and Shenzhen charge a RMB 400 fee to open an account. There is also a RMB 300 fee to open a special RMB account with the People s Bank of China. Additional costs may apply for translations and other certification requirements. Investor Codes / Account Structure B Share Market Investor ID codes are issued by the CSDCC Shanghai/Shenzhen. QFII and RQFII Schemes Investor ID codes are issued by the CSDCC Shanghai/Shenzhen. Subaccounts are permitted on the books of the subcustodian. Unique Considerations R/QFII Scheme The R/QFII application process requires extensive documentation including, contracts with their Chinese designated brokers and custodian, an investment plan, explanatory letters, application forms, audited financial statements, founding documents and authorizations to conduct business activities. Documents should be in Chinese, and some are required to be notarized and consularized. 38

40 Asset Allocation The CSRC verbally announced restrictions on asset allocation for QFIIs and RQFIIs are removed in QFII and RQFII are able to determine the allocation of their investments in different asset classes. Previously, it was compulsory for QFII's investments in equities to attribute to at least 50 percent or more of their total assets and both QFII and RQFII subject to a 20 percent restriction for assets allocated to cash and cash equivalent investments was removed. QFII and RQFIIs should not allocate a substantial percentage of assets in cash and cash equivalent investment. Ongoing Compliance Requirements According to the regulations governing the R/QFII scheme, R/QFIIs are required to notify the CSRC, PBOC, and SAFE within five days of the occurrence of any of the following situations: Change of custodian Change in authorized representatives Change of controlling shareholders Adjustment of its registered capital Subject to major litigation or other significant events Assessed a severe penalty outside of China Any other circumstances as stipulated by the CSRC and SAFE In the event of one of the following, the R/QFII should apply to renew their investment license: Change of business name Merger or acquisition with another company(s) Any other conditions as stipulated by the CSRC and SAFE R/QFIIs are responsible for ensuring the investors its represents are in compliance with all regulations such as information disclosure obligations. Appointment of Local Representatives R/QFIIs are required to appoint the following local representatives: Direct agreement with a Chinese custodian (subcustodian) Chinese securities company; up to three local brokers per stock exchange (Shanghai and Shenzhen) Appointment of Chinese certified public accountant Chinese translation agency Investment Quota R/QFII will be granted the investment quota at the R/QFII entity level rather than at the product level. The approved investment quota is also known as basic quota which will be granted up to 39

41 a certain percentage of R/QFII asset size. The basic quota is calculated base of the following benchmark: QFII Basic Quota Formulas For QFII whose assets or assets under management are primarily outside China: Basic quota = USD 100 million + 0.2% of Applicant s Average Securities Asset Size over the previous 3 years - USD equivalent of any RQFII quota obtained by the Applicant For QFII whose assets or assets under management are primarily inside China: Basic quota = RMB 5 billion + 80% of Securities Asset Size over previous year - any RQFII quota obtained by the Applicant RQFII Basic Quota Formulas For RQFII whose assets or assets under management are primarily outside China: Basic quota = USD 100 million in RMB equivalent + 0.2% of Applicant's Average Asset Size over the previous 3 years - RMB equivalent of any QFII quota obtained by the Applicant For RQFII whose assets or assets under management are primarily inside China: Basic quota = RMB 5 billion + 80% of Applicant's Average Asset Size over the previous year - RMB equivalent of any QFII quota obtained by the Applicant The R/QFII is not required to file the application of investment quota with SAFE when R/QFII adjusts the investment quota across various products. For QFII, basic quota will be granted no less than USD 20 million and no greater than USD 5 billion. Sovereign funds, central banks, and monetary authorities will obtain the basic quota no greater than USD5 billion. There is no specific minimum or maximum quota amount granted for RQFII investors. If R/QFII applies amount of investment quota greater than the basic quota, an official approval from SAFE must be obtained. When the existing R/QFII applies for additional investment quota, if the existing amount of the approved investment quota plus the amount of the additional investment quota is less than the basic quota, R/QFII requires filing the application with SAFE only. If the existing amount of the approved investment quota plus the amount of the additional investment quota is less than the basic quota, an official approval from SAFE must be obtained. An R/QFII is required to surrender its license in the event it does not apply for investment quota within 1 year of obtaining its Securities Investment Business License. PBOC CIBM Direct Scheme 40

42 There is no quota assigned for access to the CIBM. However, the investor must designate its intended investment amount on the Investor Registration Form which functions similar to a quota. Investors are able to establish their intended investment amount; there is no minimum or maximum. The investor is required to remit in at least 50 percent of its intended investment amount within nine months of receiving the Registration Filing Notice. Investors that have not remitted in at least 50 percent of the intended investment amount prior to the expiration of the nine month window will be required to refile their Investor Registration Form stating a more accurate intended investment amount. It is recommended that investors submit revised Investor Registration Forms no less than one week prior to the expiration of the nine month remittance Quarterly Reviews The CSRC requires R/QFIIs to provide a report which conveys details on the R/QFIIs operational model as well as client background information. The report must be submitted to the CSRC by the tenth day of the month following each quarter-end. The report reviews how the accounts have been set up (e.g. open-end funds), the total assets of the account and information relating to how the accounts have been funded (i.e. percent of assets from institutional investors, retail investors, etc). The form needs to be signed by the R/QFII s designated Compliance Officer and should include information regarding the operation model used based on the definitions outlined by the CSRC. Annual Reviews The CSRC also requires R/QFIIs to provide a report which conveys details on the R/QFIIs operational model as well as details on the fund managers and brokers on an annual basis. The report must be submitted to the CSRC by the end of February in any given year. The report reviews how the accounts funded (e.g. via mutual funds, insurance funds, retail investors, etc), where the assets funding the account have been sourced from (e.g. North America, Europe, and other locations), who the fund's investment advisors, and brokers are, as well as details on hey investment personnel such as the head of R/QFII business and head of Compliance. Annual Audits The CSRC and SAFE have provided verbal guidance on the annual audits are not a regulatory requirement for R/QFII. However, for QFII, local subcustodians are required to ensure the total monthly repatriated amount cannot exceed 20 percent of the QFII s total investment assets as of the end of the previous year. Therefore, it is subject to local subcustodians discretion if e an 41

43 audited financial reports an official statements with a total QFII s investment assets as of the end of the previous year issued by a local CPA as supporting documents. Please note that documentation requirements may change due to changes in local regulation as well as subcustodian requirements. 42

44 Investment Restrictions Ownership Limitations Sector Limitations There are certain sectors which may be restricted to foreign participation by R/QFIIs. The list of these sectors and affected A-share listings is pending with the CSRC and Shanghai and Shenzhen stock exchanges. According to the regulations, there are certain sectors, such as gold mining and defense industries, which cannot issue B shares. There are currently no restrictions on foreign investors to purchase B shares. Instrument Limitations A foreign investor may not exceed 10 percent of the listed company s total outstanding shares. The aggregate foreign ownership in a listed company by all foreign investors may not exceed 30 percent of the company s total outstanding shares. R/QFII are not permitted to invest in bond repos. Foreign investors accessing the China market via the QFII and RQFIIs scheme are permitted to invest in the following instruments: Listed RMB-denominated A shares Listed corporate and governments bonds Open-ended and closed-ended funds (including ETFs ) Convertible bonds Listed warrants Bonds traded on China Inter-bank Market (CIBM) Index futures Foreign investors accessing CIBM Direct Scheme are permitted to invest in the following instruments: Type I investors are allowed to invest in all cash bonds, bond derivatives (including interest rate swaps) and foreign exchange forwards. Type II investors access are allowed to invest fixed income products such as all cash bonds and bond derivatives. If the Type II investor is an offshore RMB clearing bank or RMB settlement bank, it is allowed to invest in all cash bonds, bond derivatives including repo securities. Type II investors are not allowed to invest foreign exchange forwards. 43

45 Foreign investors are prohibited from participating in securities traded in the over-the-counter (OTC) market. Monitoring Process for Ownership Limits The stock exchanges monitor foreign ownership limits on a post-trade basis. Verification Point for Ownership Limits Once the aggregate foreign ownership of a listed security reaches 16 percent, the relevant stock exchange will post this information on its web site. Foreign ownership information is then updated each time an increase of 2 percent occurs over the 16 percent threshold occurs. For individual limits, QFIIs and RQFIIs are notified should their holdings exceed the 10 percent limit as of the close of trading. Remedy for Violation of Aggregate Ownership Limits If an R/QFII exceeds the individual limit, the relevant stock exchange will advise the R/QFII s broker and subcustodian that a sell-out must be executed. The R/QFII has five business days in which to execute the sell-out, after which the stock exchange orders the R/QFII s broker and subcustodian to effect the sale of shares to bring the R/QFII within the limit. When aggregate R/QFII holdings exceed the 30 percent limit, the CSRC imposes a last buy, first sell policy. The stock exchange advises the subcustodian and broker of the affected R/QFII that a sell-out is required within five business days. If the R/QFII does not comply, the stock exchange will order the subcustodian and broker to sell shares in order to return to the 30 percent limit. In the event there is a sale of the security by another R/QFII during the five-day period, causing the level of foreign ownership to fall below 30 percent, the R/QFII may maintain its holdings. Investor Exposure to Trade Reversal for Breaching Aggregate Limits R/QFII are exposed to a sell-out of shares in the event of a breach of either the individual or aggregate foreign ownership limit. Penalty Description R/QFIIs are required to sell shares in excess of individual and/or aggregate foreign ownership limits. There are no additional penalties. Incidents of non-compliance with the sell-out notification may result in a public warning and the incident being reported to the CSRC. Short Swing Rule Article 47 of the Securities Law stipulates that, when any director, supervisor and senior manager of a listed company or any shareholder who holds more than five percent of the listed 44