Dechert Lawyers have just sent the following alert out to clients…
The Irish Financial Services Regulatory Authority (“IFSRA”) recently signed a memorandum of understanding (“MoU”) with its Chinese regulatory counterparts, the China Banking Regulatory Commission (“CBRC”) and China Securities Regulatory Commission (“CSRC”), that will permit Chinese commercial banks, fund management companies, and other securities institutions qualified under China’s Qualified Domestic Institutional Investor (“QDII”) program to invest domestic client assets in Irish-domiciled UCITS-compliant and non-UCITS investment products, among other permitted investments.
The MoU represents another important step by Chinese regulators to expand the QDII program in an effort to liberalize China’s foreign exchange restrictions and offer increased opportunities for Chinese investors to diversify their investments.
Irish-domiciled funds and their managers will now have access to Chinese investors without having to utilize local intermediaries or partners, or otherwise navigate the challenges of entering China’s domestic market directly. As Gary Palmer of the Irish Funds Industry Association pointed out, this move should strength Ireland’s attractiveness and standing as a domicile of choice for investment funds.[1]
The QDII Program
In April 2006, the Peoples Bank of China formally launched the QDII program as a means of easing upward pressure on domestic asset prices and giving Chinese investors greater experience with, and access to, overseas investment. Under the program, selected Chinese commercial banks, fund management companies, and other securities institutions that have been approved as QDIIs[2] may raise domestic assets for investment in overseas markets. Essentially, the QDII program serves as a conduit between domestic Chinese investors and non-Chinese investments (including investment funds), and a means of circumventing China’s stringent foreign exchange controls.
Although the advent of the QDII program was greeted with initial fanfare, the reception from Chinese investors has been somewhat tepid to date. Despite recent significant declines in the domestic Chinese stock markets, Chinese investors have shown a lingering bias in favor of domestic investments, while the volatility in the world’s stock markets and continued credit crisis also contribute to Chinese trepidation with respect to investing assets overseas.
Since its inception, Chinese regulators have significantly expanded the QDII program. In May 2007, the CBRC issued a circular considerably expanding the permitted scope of investment of QDII products sponsored by commercial banks to include equities and funds authorized by a supervisory authority with which the CBRC has a memorandum of understanding. The MoU with the IFSRA is the latest in a string of memoranda that the CBRC has entered into with securities regulators in major global markets, such as Hong Kong, Singapore, the United Kingdom, the United States, and Australia.
In a similar effort to help expand the QDII program, the CSRC released in June 2007 provisional regulations and a circular that provided reasonably detailed requirements regarding the establishment and operations of QDII products sponsored by securities-related institutions, such as fund management companies. Prior to the release of this CSRC guidance, QDII products sponsored by securities-related institutions did not have a firm regulatory basis upon which to develop their products.
Permitted Investments for QDIIs
Bank sponsored QDII products and QDII products sponsored by securities-related institutions are subject to different rules and restrictions, with the CSRC generally imposing less stringent restrictions than the CBRC with respect to the types of investors that may invest in QDII products and the permitted investments that may be made in overseas markets. In addition, the CSRC generally has provided a much more comprehensive set of guidelines regarding permissible investments and investment techniques.[3] However, QDII banks and QDII securities-related institutions may only invest in markets regulated by a supervisory authority with which the CBRC or the CSRC (as appropriate) has entered into a memorandum of understanding. With respect to investments in funds, each type of QDII is restricted to investing only in funds that are approved/registered by the foreign supervisory authority. Since the CSRC has entered into memoranda of understanding with regulators in a significantly larger number of jurisdictions, QDII products sponsored by securities-related institutions are permitted to invest in a broader array of investments, including funds.
Conclusion
Given recent economic and market uncertainty and the early struggles of the QDII program in this environment, the immediate impact of the MoU between the Chinese regulators and the IFSRA will likely be modest. However, it is widely believed that the QDII program will expand significantly in the future, which should carry with it the potential for a significant long-term impact on both Chinese investors and foreign markets such as Ireland that have been approved by Chinese regulators as permissible markets for their investments.
