Door widens for foreign fund managers to invest in China

September, 2006 - Hong Kong, Hong Kong

The China Securities Regulatory Commission (CSRC), People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly issued new regulations effective 1 September 2006 that govern the regime allowing qualifying foreign institutions approved by the CSRC as Qualified Foreign Institutional Investors (QFIIs) to invest in China A shares and other Renminbi (RMB)-denominated securities in the People's Republic of China (PRC) subject to the grant of investment quotas by SAFE.

Key relevant changes for fund managers under the New QFII rules include the following:

• The qualifying criteria for fund management institutions in terms of assets-under-management (AUM) has been reduced from US$10 billion to US$5 billion for the most recent financial year. The requirement for five years operating history remains.

• QFIIs may now operate multiple securities sub-accounts with the PRC clearing and settlement house and have corresponding multiple RMB special accounts. The sub-accounts may be opened as direct accounts or as nominee accounts by a QFII for underlying customers for whom it provides asset management service. Where a fund manager QFII establishes a securities account for funds under its management, the account may be opened in the direct name of "QFII+fund". It is expressly provided that assets in such account belong to the relevant fund and are independent of the QFII and the custodian.

• The new regulations no longer set out the specific requirements with respect to remittance and repatriation, but instead provide that remittance, repatriation and any lock-up period shall be as adjusted by SAFE based on the economic and financial situation of the PRC, foreign exchange balance of payments and according to arrangements set by the PBOC. At press time, SAFE has yet to issue any supplemental regulations that specify the remittance and repatriation requirements. However, based on previous proposals, the lock-up period may be reduced to three months for open-ended investment funds and similar investment bodies, and further the three months lock-up period may start to run from remittance of a certain minimum amount of the QFII quota (rather than the full QFII quota) and thereafter, remittance and repatriation may generally be made freely according to subscription and redemption requirements of such funds.

Taylor Hui, a partner of the Financial Services Practice Group at leading Hong Kong law firm Deacons, said today - "To a certain extent, the new rules document some practices that have already been implemented. The improvements in the rules will be welcomed by foreign funds managers and we are already helping clients to set up more dedicated China funds."

Vivien Teu, an associate at the Practice Group, added that - "The new QFII rules represent very encouraging changes for foreign fund managers to apply for approval as QFIIs for investment into China by its asset management clients or funds under management."

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Notes for Editors:
Deacons is a leading business law firm with a network of affiliated firms comprising over 900 legal professionals across Asia Pacific Region. With over 150 years of experience in providing legal services, Deacons' clients are assured of the integrity and stability of one of the region's oldest and most respected law firms.

Deacons has been ranked as a Global 50 Firm for the past three years by the PLC Which Lawyer? (2004, 2005 and 2006 editions). The firm has also been awarded the "2006 IFLR Hong Kong Law Firm of the Year" by the International Financial Law Review (IFLR).

Deacons' Financial Services Group is credited as being the market leader in Hong Kong in terms of size, depth of client base and range of funds we have established. The Group has been ranked first-tier for the past six years by Asia Pacific Legal 500.

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