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12 June 2012
On April 24 2012 the Swedish Financial Supervisory Authority and the China Securities Regulatory Commission entered into a memorandum of understanding on mutual regulatory cooperation in relation to the Chinese capital markets.
The memorandum, which took effect on the date of its inception, enables Swedish institutional investors – for the first time – to apply for a licence to invest directly in the Chinese capital markets, such as the Shanghai Stock Exchange (the world's fifth largest stock market).
This update summarises the key points of the memorandum.
Since 2002 foreign investors have been allowed to invest directly in the Chinese capital markets, provided that they hold a qualified foreign institutional investor (QFII) licence. In order to obtain a QFII licence from the China Securities Regulatory Commission, a memorandum of understanding must be in place between the relevant financial supervisory authority in the investor's home country and the commission.
Foreign institutional investments are limited by a maximum investment quota jointly determined by the People's Bank of China, the State Administration of Foreign Exchange and the commission. In April 2012 the investment quota for the QFII programme was increased from $30 billion to $80 billion.(1)
Since the QFII programme was launched, 158 institutions from 23 countries have been approved to invest under the programme. For example, Norway entered into a memorandum of understanding with the commission in 2006. The Norwegian central bank is currently the only Nordic investor which has been granted a QFII licence.
QFII licence application process
In order to obtain a QFII licence, a prospective investor must engage a qualified commercial bank in China to act as its custodian.(2) The QFII licence application must then be made by this Chinese custodian on behalf of the prospective investor. The commission requires that the prospective investor:
The application to the commission requires the following:
After reviewing the application documents, the commission will determine whether to grant the licence within 20 business days of receipt of the application.
In addition, the investor must apply for an individual investment quota from the State Administration of Foreign Exchange. When applying for a quota, the following documents must be submitted to the administration:
The application for a quota shall be made within one year of the grant of a QFII licence from the commission. The administration will determine whether to grant the requested quota within 20 business days of receipt of the application.
Accordingly, the application process can take up to 18 months.
Under the QFII scheme, several restrictions apply:
The commission no longer asks QFII investors to invest a minimum of 50% of their assets in the Chinese stock markets. The commission may also grant QFII licences to investors in the same group.(3)
Memorandum of understanding
Framework for mutual assistance and exchange of information
Under the memorandum of understanding, the Swedish Financial Supervisory Authority and the commission undertake to establish a framework for mutual assistance and to facilitate the exchange of information between the authorities to ensure compliance with their respective securities and futures laws and regulations.
The purpose of the memorandum is to promote investor protection and the integrity of the Chinese capital markets. The memorandum is to be regarded as a basis for cooperation and creates no legally binding international obligations for the parties.
To the extent permitted by their respective domestic laws and regulations, the parties undertake to provide each other with relevant information on actual and potential violations of their respective security regulations.
Under the memorandum, the parties agree to exchange information and provide each other with assistance in the following areas:
In order to obtain assistance under the memorandum, the requesting authority must submit a written request to the requested authority. The request must include:
Requests shall be dealt with within a reasonable timeframe. The requested authority shall assess whether the information can be provided under the terms of the memorandum. If a request cannot be accepted completely, the requested authority shall consider whether it can be partially accepted.
When deciding whether to accept or decline a request, the requested authority shall consider, among other things, whether:
Where an authority has information that will assist the other authority in the performance of its regulatory functions, such information can be provided on a voluntary basis.
Under the memorandum, assistance or information shall be provided by the authorities only for the purposes of assisting the other authority in the performance of its administrative enforcement functions. Should an authority intend to use information in a civil or criminal procedure, it must refer to the providing authority for its prior written consent.
The parties undertake, to the extent permitted by their respective laws, to keep confidential any requests of information under the memorandum, as well as any matter arising in the course of its operation. Any information or assistance provided under the memorandum may be disclosed to third parties only where prior written consent from the providing authority has been obtained, unless the third party concerned is subject to similar confidentiality requirements.
If either party becomes aware that the information obtained under the memorandum may be subject to a legally enforceable demand of disclosure, it must, to the extent permitted by law, inform the other party. The parties shall then have a discussion and determine an appropriate course of action.
The parties have stated that they intend to cooperate in the field of technology to facilitate the development of the regulatory framework for securities and other investment product markets in their respective countries.
The Chinese authorities' decision to increase the quotas under the QFII licence scheme is a welcome development in the process of opening up China's capital markets to international investors. The same applies to the memorandum.
The memorandum is fundamental to Swedish investors' ability to invest directly in the Chinese stock markets (eg, in the Shanghai and Shenzhen stock markets). To achieve QFII status, prospective investors must complete a comprehensive licence procedure and, to that end, it will be necessary to engage qualified local advisers with good contacts within the Chinese authorities.
The Chinese authorities view the prospect of increased Swedish ownership in China's capital markets positively and the outlook for investors seeking to obtain a QFII licence appears promising.
For further information on this topic please contact Niclas Rockborn, Charlotta Falkman or Julia Asplund at Gernandt & Danielsson Advokatbyrå by telephone (+46 8 670 66 00), fax (+46 8 662 61 01) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
(2) There are currently 15 QFII custodian banks in China. These include both Chinese banks (eg, Bank of China and China Construction Bank) and foreign banks (eg, HSBC, CitiBank and Standard Chartered Bank).
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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