Foreign Investment Bulletin

March 21,2016

The State Administration of Foreign Exchange has implemented the Administrative Provisions on Foreign Exchange for Domestic Securities Investments by Qualified Foreign Institutional Investors, which relaxed the foreign Institutional Investors, which relaxed the foreign exchange regulations with regard to securities investment by Qualified Foreign Institutional Investors in China.

The PBOC promulgated [2016] No.3 Announcement, opening the interbank bond market to eligible foreign institutional investors.

1. SAFE has implemented New QFII Rules

The State Administration of Foreign Exchange (“SAFE”) promulgated the Administrative Provisions on Foreign Exchange for Domestic Securities Investments by Qualified Foreign Institutional Investors(“New QFII Rules”), on February 3,2016,effective as of publication. The New QFII Rules amended the procedures through which Qualified Foreign Institutional Investors(“QFIIs”) obtain their investment quotas, changing from a system where approvals were required for all cases to a system where only record-filings are required within the limit of the Basic Quota and approvals are necessary only if the Basic Quota is exceed. The New QFII Rules also relaxed the restrictions with respect to the limit for investment quotas, the time lime for remitting in the investment principal and its lockup period, and the outbound remittance of funds.

1.1 Background

On September 29,2009,SAFE announced the Administrative Provisions on Foreign Exchange for Domestic Securities Investments by Qualified Foreign Institutional Investors(“Old Rules”),which were later revised on December 7,2012,requiring QFIIs to get approval to obtain investment quotas.

On September 30,2015,SAFE promulgated the Operating Guidelines for the Administration of Quotas for Qualified Foreign Institutional Investors (“Quotas Guidelines”), which comprised supplementary provisions with respect to the classification of QFII investment quotas and the extension of the time limits for QFIIs to remit in their investment principals.

On February 3,2016,SAFE implemented the New QFII Rules, repealing the Old Rules and the Quotas Guidelines, and stipulating that the New QFII Rules shall prevail where they are in conflict with any other relevant regulation on foreign exchange.

1.2 Legal Review

Compared to the previous regulations, the New QFII Rules embrace reforms in the following aspects:

a. Acquisition of investment quotas

The New QFII Rules reformed the earlier system where all investment quotas must be approved by SAFE. The Basic Quota of each QFII is determined according to a formula which takes into account whether assets of the QFII and its corporate group (including the securities assets under their management) are primarily located in China, the size of the assets, and the Renminbi QFII Quota of the QFII.As long as its investment quota does not exceed its Basic Quota, a QFII is only required to submit supporting documents to its custodian, who shall review the documents and make record-filings to SAFE in batches. Approval from SAFE is necessary only when the investment quota of a QFII exceeds its Basic Quota.

Investment quotas obtained prior to the New QFII Rules remain valid. The New QFII Rules will only apply to any future increase in these investment quotas, and will require either approvals or record-filings depending on whether the Basic Quotas are exceeded.

b. Upper limit for investment quotas

The New QFII Rules set the upper limit for the Basic Quota of a QFII at US $5 billion, far above the US $1 billion limit for the accumulated investment quota of a QFII under the Old Rules. The New QFII Rules also removed the prohibition against an increase in the investment quota within one year after the existing investment quota was granted.

c. Time limit for remittance in the investment principle and its lockup period

The New QFII Rules abolished the time limit for remitting the investment principle and only provide that SAFE may revoke any investment quota that has not been effectively utilized within one year after its record-filing or approval.

The New QFII Rules still contain provisions on the lockup period in which the outbound remittance of investment principal is prohibited, but the length of the period is limited to three months and is not dependent on the type of the QFII. The New QFII Rules also revised the commencement date of the lockup period. Previously this was the day that the principle was fully remitted into China or six month after the approval of the investment quota; now it is the day that the accumulated investment principle remitted into China has reached the equivalent of US $20 million.

d. Outbound remittance of funds

The Old Rules permitted Open-end Chinese Funds (open-end funds established through public offerings which invest no less than 70% of their assets in China) to make weekly remittances of the balance of purchases and redemptions into or out of China.The New QFII Rules permit all open-end funds to make such remittances on a daily basis.

The New QFII Rules abolished the requirement that the investment quota be reduced according to the amount of investment principal that has been remitted out of China. A QFII,being an open-up fund or otherwise, will no longer have its investment quota reduced when its investment principal is remitted out, and to the extent of its investment quota, the QFII is free to remit the investment principal back to China afterwards.

e. Limit to the number of accounts

The Old Rules contained limits to the numbers of foreign currency accounts and Renminbi accounts that a QFII may open. A QFII could only open one foreign currency account for its own funds, for the funds of its clients , and for each Open-end Chinese Fund, respectively, and were limited to no more than six Renminbi accounts for the clients’ funds under its management for the purpose of investment in Chinese securities markets. The New QFII Rules do not contain any limit to the number of accounts.

1.3 Next Step

The New QFII Rule will surely boost QFII investment activities in the capital markets in China and their effect will continued to be monitored.

2. No.3 Announcement regulating investments by foreign institutional investors in interbank bond market

On February 17,2016, the People’s Bank of China(“PBOC”) promulgated and implemented Announcement of the People’s Bank of China [2016] No.3 (“No.3 Announcement”), allowing foreign institutional investors eligible under such Announcement to invest in the interbank bond market via authorizing settlement agents of the interbank bond market to conduct investments and settlement. The PBOC encourages foreign institutional investors to invest in the interbank bond market as long-and-medium-term investors, and exercises macro-prudential supervision over investment behaviors of foreign institutional investors.

2.1 Background

In August 2010, to advance the trial of Renminbi settlement for cross-border trading, and to facilitate Renminbi repatriation, the PBOC issued the Yin Fa[2010] No.217 Announcement, to conduct a trial on investments in the interbank bond market by foreign Renminbi settlement bank and other two institutions using Renminbi, which clarifies the entry requirements and investment quota approval system for foreign institutional investors investing in the interbank bond market. In March 2013, the PBOC issued the Circular on Matters Relating to Qualified Foreign Institutional Investors’ Investment in the Interbank Bond Market which, based on the entry requirements and quota approval system as mentioned above, further includes more investment participants and clarifies that eligible investors are able to participate in the interbank bond market if approved as eligible investors by China Securities Regulatory Commission and with investment quota approved by State Administration of Foreign Exchange. In July 2015, to improve the efficiency of investment in the interbank bond market by the foreign central banks, monetary authorities, international financial institutions and sovereign wealth funds, the PBOC issued the Announcement of the People’s Bank of China on Matters Concerning Trail Renminbi Investments by Foreign Central Banks, International Financial Organizations and Sovereign Wealth Funds in the Interbank Bond Market (Yin Fa [2015] No.220,”No.220 Announcement”),to implement an investment filing system for these three types of investment bodies, different from the entry requirements and quota approval system , and to enable relevant investment institutions to decide their own investment scale. The above developments indicate a trend that the interbank bond market is being gradually opened to foreign institutional investors.

Nevertheless, the 2015 Statistics Analytical Report of Bond Market issued by the China Securities Depository and Clearing Corporation Limited earlier this year noted that as of December 31,2015, the bond holding rate by foreign institutions is around 1.72%, indicating that participation by foreign institutions is still relatively low.

2.2 Legal Review

Compared with the above regulations, No.3 Announcement includes more foreign institutional investment participants and simplifies the management of market entry procedure.

First, while restating the continuing effectiveness of No.220 Announcement, No.3 Announcement clarifies that the interbank bond market will be opened to the following eligible entities: (I)financial institutions legally registered and incorporate outside China, including commercial banks, insurance companies ,securities companies ,fund management companies and other assets management companies;(II) investment products issued by the above financial institutions legally to their clients;(iii)pension funds, charity funds, donation funds and other long-and-medium-term institutional investors approved by the PBOC; and (iv) the QFII and Renminbi Qualified Foreign Institutional Investors (“RQFII”).

Secondly , the No.3 Announcement replaces the pre-entry approval system for foreign institutional investors to enter into interbank bond market with the post-entry filing system(note: although No.220 Announcement introduces a filing system, No.220 Announcement states that foreign institutional investors shall only conduct investment behaviors after competition of filing procedures). Furthermore, regarding whether investors satisfy the requirements for investment participants under the No.3 Announcement ,such issues will be handled by a settlement agent authorized for foreign institutional investors to provide investment and settlement services. The No.3 Announcement states that foreign institutional investors shall authorize an interbank bond market settlement agent with the ability to conduct international settlement services to complete the investment filing procedures; and before authorization, the settlement agents are obliged to conduct examination and inspection of foreign institutional investors according the PBOC regulations and shall only accept the authorization by eligible foreign institutional investors.

2.3 Next Step

The No.3 Announcement fails to clarify the types of investment opened to foreign institutional investors and only states that eligible foreign institutional investors may conduct “transactions approved by the PBOC ,such as cash bond transactions”, in the interbank bond market. In comparison, types of investment allowed to be conducted by central banks, international financial institutions and sovereign wealth funds in the No.220 Announcement are clearer and broader. Hence, it is still unclear whether the types of investment eligible for central banks, international financial institutions and sovereign wealth funds are the same as those eligible under No.3 Announcement for foreign institutional investors. Since the No.3 Announcement states that the PBOC Shanghai Head Office shall formulate and implement rules based on such Announcement, it is hopeful that requirements that foreign institutional investors shall comply with to invest in the interbank bond market and specific types of bond investments can be further clarified with the implementation of the rules.

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