China unveils guideline for RQFII investors

China's central bank on Thursday unveiled a technical guideline for foreign investors' yuan-denominated activities in the mainland's equity markets, moving a step closer in opening its capital markets and promoting the yuan's overseas use. The guideline on the implementation of the Renminbi Qualified Foreign Institutional Investor (RQFII) pilot scheme is part of the People's Bank of China (PBOC)'s latest efforts to regulate a potentially booming market with the backflow of yuan from overseas. According to the PBOC guideline, overseas institutions under the RQFII pilot program should first open their RQFII basic deposit accounts, as well as special deposit accounts for settlement purposes, through a domestic commercial bank that is qualified to act as a QFII custodian. If RQFII investors are interested in the trading of stock futures, they should create their own special deposit accounts through their custodian bank. The PBOC will set up a firewall between the accounts of RQFII's own capital, the funds of their clients and other accounts, prohibiting money transfers between such accounts. RQFII investors must create a separate special account for each open-ended fund they launch. Cash withdrawals from special deposit accounts are also prohibited. RQFII investors can remit their investment principal from overseas into their special deposit accounts. All accounts except open-ended funds should provide an audited report by a domestic accounting office and related tax statements before exporting their investment revenues, according to the guideline. The PBOC technical requirement comes more than one month after China's securities regulator announced the loosening of restrictions to allow Hong Kong subsidiaries of Chinese mainland commercial banks and insurance companies or financial institutions to enter the scheme, along with fund and securities firms. China launched the RQFII scheme in December 2011 to first allow a maximum of 20 billion yuan (3.22 billion U.S. dollars) worth of exchange-traded-funds raised offshore to be invested in the domestic capital market. It has gradually raised the total RQFII investment quota to 270 billion yuan in domestic capital markets. The Chinese government has encouraged the use of yuan in cross-border trade and investment settlements in recent years. It has also allowed foreign direct investment with yuan funds obtained overseas through offshore yuan markets such as Hong Kong.