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In order to facilitate Qualified Foreign Institu-tional Investors' trading in PRC securities and investment in foreign currency, on 9 September 2003 the PRC's State Administration of Foreign Exchange issued its Circular of the General Af-fairs Department of the State Administration of Foreign Exchange on Operational Issues Related to Foreign Exchange Administration of QFII. The main content is as follows:
The PRC custodian of a QFII may set up a single RMB special account for each QFII. A QFII may not set up any other account with its custodian for the purpose of conducting QFII investment business.
A custodian may not open a sub-account of an RMB special account for a QFII.
For as long as a QFII carries on its investment business, its costs incurred inside the PRC, including custodianship costs, management costs, auditing costs and other expenses, must all be paid from its RMB special account. Conversely, costs incurred outside the PRC may not be paid from the RMB special ac-count.
If the amount to be invested by a QFII is be-tween US$50 million and US$100 million, its first remittance of principal into the PRC must be not less than 20% of the amount to be in-vested; if the amount to be invested is between US$100 million and US$200 million, the first remittance must be not less than 15% of the amount to be invested; if the investment amount is between US$200 million and US$400 million, the first remittance must be not less than 10% of the investment amount; and if the investment amount is between US$400 million and US$800 million, the first remittance must be not less than 5% of the investment amount. (The upper figure in each of the above bands is inclusive.)
If the amount of principal remitted into the PRC by a QFII is less than US$50 million, then after conversion into RMB the QFII is only permitted to deposit the amount with its custodian; it is not permitted to invest it in securities. If the amount remitted does not reach US$50 million within the period of va-lidity of the approval of the investment amount, the remitted principal is subject to the lockup period provided for by the Provisional Regulations Governing Domestic Securities Investments by Qualified Foreign Institutional Investors, before it can be remitted out of the PRC in phased tranches.
A QFII may remit its profits out of the PRC on an annual basis. The profits that a QFII is permitted to remit outward are cumulative, realized profits from previous years.
If a QFII transfers its approved investment amount to another entity, the acquiring entity must remit principal from outside the PRC in an amount not exceeding the approved in-vestment amount, and must complete its re-lated payments of funds to the transferring entity within the PRC. Within five working days from the date on which the transferring entity receives the transferred funds, the cus-todian must remit the funds out of the PRC on the basis of the SAFE's approval notice au-thorizing the transfer.
In any one application, an overseas fund management company must opt for either a closed-ended or an open-ended fund. If an overseas fund management company has had an investment amount approved for a closed-ended fund and subsequently applies for approval of an investment amount for an open-ended fund (or vice versa), then the subsequent application will be treated as a new and separate application, and not as an appli-cation to increase the original investment amount. Therefore the company will need to apply for a separate QFII foreign exchange registration certificate and a separate RMB special account, and the two funds must be separately audited and managed, with separate accounting records.
If a QFII changes its custodian, the original custodian must pass all related files to the new custodian, but must retain copies of all files for inspection, for a period of 15 years.
