As China opens its A-share market to foreign capital, which has previously been reserved for domestic investors, are now available to foreign investors through the qualified foreign institutional investors ("QFII") (合格境外机构投资者) scheme.

Eager to attract large, long-term foreign investors to reduce domestic market volatility while keeping international speculators at the door, rules taking effect on 1 December, 2002 allow qualified foreign institutions to buy the RMB-denominated A-shares traded on the Shanghai and Shenzhen stock exchanges for the first time, along with Government and corporate bonds listed on the two exchanges.

Basically QFII is a brokerage business, which allows qualified foreign institutions to trade Chinese A-shares via special accounts opened at designated custodian banks, for their clients. The QFII mechanism provides foreign investors an opportunity to take position on China's markets and buy stakes in Chinese companies, thus sharing in China's phenomenal growth.

The financial instruments a QFII can invest in includes: Shares listed on China's stock exchanges (excluding B shares); Treasuries listed on China's stock exchanges; Convertible bonds and enterprise bonds listed on China's stock exchanges; Other financial instruments approved by the CSRC; Shares held by each QFII in one listed company should not exceed 10% of total outstanding shares of the company (a rule also enforced for domestic investors); Total Shares held by all QFIIs in one listed company should not exceed 20% of total outstanding shares of the company.

The candidates to become a QFII are: Overseas fund management institutions, Insurance companies, Securities companies, and other assets management institutions which have been approved by the CSRC. In order to encourage medium and long-term investments, the CSRC stated that it will give preference to institutions managing closed-end Chinese-focused funds, or pension funds, insurance funds and mutual funds with good investment records in other markets.

The regulators of the securities investment activities conducted by QFIIs are: China Securities Regulatory Commission (CSRC) and State Administration of Foreign Exchange (SAFE). They are responsible for overseeing all transactions and conducting annual inspections on QFIIs. SAFE is responsible overseeing business tied with foreign exchange operations, such as the approval of the QFII investment quotas, issuance of the foreign exchange certificate, supervision of account management and foreign exchange settlements (as specified in Foreign Exchange Control on Securities Investments in China by Qualified Foreign Institutional Investors Tentative Provisions). The CSRC is the approval authority for QFII status. It interprets the rules regarding QFII and takes the role of a general regulator.