What Is a Qualified Foreign Institutional Investor?

Qualified Foreign Institutional Investor (QFII) is a program that allows specified licensed international investors to participate in mainland China's stock exchanges. The Qualified Foreign Institutional Investor program was introduced by the People's Republic of China in 2002 to provide foreign institutional investors with the right to trade on stock exchanges in Shanghai and Shenzhen. Before the launch of the QFII program, investors from other nations were not allowed to buy or sell stocks on Chinese exchanges due to the country’s tight capital controls.

Understanding QFII

The Qualified Foreign Institutional Investor program quota was set at $80 billion in April 2012, a decade after the program launched. As of April 2018, nearly 300 overseas institutions had received quotas totaling roughly $100 billion. The quotas are granted by China's State Administration of Foreign Exchange (SAFE), and the quotas can be changed at any time in response to the country's current economic and financial conditions. The type of investments that can be traded as part of the QFII system includes listed stocks (but exclude foreign-oriented shares), treasury bonds, corporate debentures, convertible bonds, and other financial instruments as approved by the China Securities Regulatory Commission (CSRC).

To be accepted as a licensed investor, certain prerequisites must be met. These qualifications are determined by the type of institutional investor who applies for a license, such as a fund management company or insurance business. For example, fund management companies must have at least five years of asset management experience and at least $5 billion of assets under management during the most recent accounting year. A certain amount of foreign currency, transferred and converted to local currency, is also mandatory for approval.

With the launch of the QFII program, licensed institutional investors can purchase and sell yuan-denominated "A" shares, which are shares of mainland China-based companies. Foreign access to these shares is constrained by specified quotas used to regulate the amount of money that licensed foreign investors can invest in China's capital markets.

New Rules Make the QFII Program More Attractive

Until very recently, foreign institutions invested in China’s stock or bond markets through the QFII program could only repatriate up to 20 percent of its investments every month. Also, each time a QFII participant sought to move money out of China for the first time, they were prevented from doing so by a three-month “lock-up” restriction. However, that has now changed.

As of mid-June 2018, China lifted both the 20 percent remittance ceiling and the three-month lock-up period for all new and existing QFII participants. As an added incentive, China for the first time now allows QFIIs to perform hedging to manage foreign exchange risks.