Investment Issues

QFII
Qualified Foreign Institutional Investor is a scheme launched on 5 November 2002 by the CSRC and the People’s Bank of China to allow approved foreign financial institutions to invest in RMB-denominated equity and bond markets. QFIIs can trade A-shares for their clients, via special accounts at designated banks (including HSBC, Standard Chartered, Citibank and Deutsche Bank) - provided that no more than 20% of shares in any Chinese company are held by QFIIs and no one QFII holds more than 10%.

QDII
Qualified Domestic Institutional Investor is a scheme launched on 13 April 2006 to allow approved Chinese financial institutions (initially 15 commercial banks) to invest in certain types of financial products overseas on behalf of their customers. Although products are designed by banks, the banks take the role of an agent since banks are not allowed to invest in QDII in their own name. QDIIs are given an annual quota. Since May 2007, up to 50% of that quota may be invested in stock-related products, provided that not more than 5% is invested in any one security and individual customers make a minimum commitment of RMB300,000. QDII is a transitional arrangement which provides limited opportunities for domestic investors to access foreign markets until China’s currency is freely floated and capital is able to move in and out of the country completely freely.

Through Train
The so-called ‘through-train’ scheme, announced in August 2007 by SAFE, was intended to allow mainland citizens to buy shares in Hong Kong through an account with the Bank of China’s branch in Tianjin. Concerns over the implications, especially on domestic share markets and lending institutions, have resulted in the scheme being returned to the drawing board for the time being, although given the pressures of inflation, foreign exchange and globalisation, the regulations are expected to be relaxed in the mid term.

Circular 75
The ‘Circular on Issues Relating to Foreign Exchange Administration of Equity Financings and Return Investments by Domestic Residents through Offshore Special Purpose Vehicle’ was issued by SAFE on 21 October 2005 and became effective on 1 November 2005. It allows regulated Chinese residents to establish offshore Special Purpose Vehicles for equity financing in the international capital market through reverse mergers and acquisitions, equity swaps, transferable bonds and other means of capital operation. Previous circulars were aimed at preventing the state assets being sold cheaply overseas but effectively prevented private investment into China.

Ordinance 10
A rule introduced on 8 September 2006 that requires Chinese firms seeking to list overseas to obtain additional government approvals from SAFE and MofCOM in order to address concerns that Chinese companies were being sold too cheaply to foreigners and abusing tax breaks. The effect has been to slow down the approval process and reduce the number of businesses that are able to list outside China, especially those structuring through and offshore financial centre. This has not stopped Chinese businesses from listing outside the PRC, since many companies already had assets overseas or have transferred assets to a WOFE. SAFE has also intimated that it is keen to find co-operative partners who can act as trusted conduits to increase the flow of overseas listings.

WOFE
(Pronounced ‘Woofy’)= Wholly-Owned Foreign Enterprise. A WOFE is a company registered in China that is 100% foreign-owned. This allows the foreigners to retain complete control and avoids second party investors, but WOFEs are not allowed to sell their products into the Chinese market. WOFEs are often located in one of the Special Economic Zones, where they can take advantage of special tax rates, improved infrastructure, and a variety of local suppliers and services.

JV
A Joint Venture is a company registered in China that is part foreign and part Chinese owned, usually with the foreign owner holding the majority share. The complexities of China make a good Chinese partner an invaluable asset and the approvals processes are simpler than for a WOFE. Also, JVs can sell to the Chinese market.

ATA
China’s Anti-Trust Act, which came into effect on 1 August 2008,is the latest iteration of regulations designed both to protect national assets (in the face of foreign mergers and acquisitions) and to maintain market competition. Rulings are given by a dedicated bureau under MofCOM. Coca-Cola’s bid for Huiyuan Juice in September 2008 is the first case to test the new law.