(People’s Bank of China)

China moves to further ease foreign access to derivatives transactions


China’s central bank (PBoC) and the country’s Securities Regulatory Commission (CSRC) announced on Friday (Oct. 15) that they will expand access to Chinese financial derivatives transactions to qualified overseas investors.

Derivatives are financial contracts, set between two or more parties, that derive their value from an underlying asset, group of assets, or benchmark. The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indices.

Investors under the Qualified Foreign Institutional Investor (QFII) scheme will be able to trade commodity futures and commodity options and to hedge stock options positions from November 1.

The two institutions expect that the move will help the world’s second largest economy “attract more foreign funds” and “increase the international influence of the domestic capital market” while providing foreign investors with more hedging tools.

“Guided by the goal of further opening up China’s capital markets, the CSRC will work with the PBC and  the State Administration of Foreign Exchange (SAFE), to closely monitor market dynamics and continually assess a proper timeline of opening more asset classes to foreign investors” China’s securities regulator said.

The Qualified Foreign Institutional Investor (QFII) scheme was one of the first key efforts to internationalize mainland China’s financial markets. Together with the RMB Qualified Foreign Institutional Investor (RQFII) are the quota/approval-based inbound investment programmes launched by the Chinese government in 2002 and 2011 respectively.

These schemes enable qualified foreign institutional investors to gain direct access to China capital markets in order to trade “A-shares” of Chinese stocks, bonds and securities investment funds, etc., denominated in China’s renminbi/yuan (RMB).

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.

In November 2020, a new QFI regime (QFII and RQFII are collectively referred to as QFI) went into force, which has eased the access to China capital markets. The most significant change was the merger of the QFII and RQFII schemes into one scheme, allowing for a one-time application with relaxed entry criteria and simplified application documents. The approval time was also reduced from 20 days to 10 working days once the application documentation fulfills CSRC requirement.

From Nov 1, 2020, the day the new investment regulation for qualified foreign institutional investor and renminbi qualified foreign institutional investor schemes took effect, to Dec 22, 2020 China received 62 applications from overseas institutions to become QFIIs, according to the China Securities Regulatory Commission’s website. In the January-October 2020 period, there were only 31 QFII and RQFII qualification applications.

China continues to open up its domestic financials market attracting overseas capital.