Definition of QFII
QFII refers to foreign funds management company, insurance company securities companies and other asset management institutions approved by the China Securities Regulatory Commission ("CSRC") (中国证券监督管理委员会) to invest in the PRC securities market within the quotation obtained from the State Administration of Foreign Exchange (国家外汇管理局).

Requirements to be a qualified QFII
The applicant should be financially stable, reputable and satisfy the asset requirements as stipulated by CSRC. The detailed requirements in this respect include the follows:

1. Funds management company: operating for more than 5 years in fund management business operation, assets under its management in the last financial year to be no less than USD 10 billion;
2. Insurance company: operating for more than 30 years in insurance business, paid-in capital of no less than USD 1 billion, "assets in securities" under its management in the last financial year to be no less than USD 10 billion;
3. Securities company: operating for more than 30 years, paid-in capital of no less than USD 1 billion, "asset in securities" under its management in the last financial year to be no less than USD 10 billion;
4. Commercial bank: total assets in the last financial year ranking within the worldwide top 100, "asset in securities" under its management to be no less than USD 10 billion.
   Employees of the applicant should satisfy the related professional qualifications of the country or area in which the QFII locates.

Employees of the applicant should satisfy the related professional qualifications of the country or area in which the QFII locates.

The applicant should have sound management structure and internal control system. It should not have been severely penalized by the relevant securities supervision and legislation organizations within the last 3 years.

The country where the applicant located should have sound securities law and supervision systems, have concluded a cooperation memorandum with the CSRC and maintain an effective supervisory and corporation relationship.

Allowable investment activities for a QFII
QFII is able to invest in the following securities listed in the China's securities exchanges:

• "A-shares" (excluding "B-shares") (股票);
• Government Bonds (国债);
• Convertible Bonds and Corporate Bonds (可转换债券和企业债券);
• Other financial instruments as permitted by the CSRC.

Custodian
Requirements to be a qualified custodian bank include the following:

• The custodian bank has a specific fund custody department.
• It has paid-in capital of no less than RMB 8 billion.
• It has sufficient professionals who are familiar with the custodian business.
• It can safely manage the entire assets of the fund.
• It has qualifications to conduct foreign exchange and RMB business.
• It does not have a material breach of foreign exchange regulations for the last three years.

Bank of China was the first bank to apply with relevant authorities for the qualification of a custodian for QFII.

According to the official news as of January 2003, six domestic banks, i.e. the Bank of China, the Industrial and Commercial Bank of China, the China Construction Bank, the Bank of Communication, the Agricultural Bank of China and the Merchants Bank, and the Shanghai Branches of three foreign banks, i.e. HSBC Holdings, Citibank and Standard Chartered Bank, have been approved to carry out custodian business for QFII by the People's Bank of China (中国人民银行). However, the above-mentioned banks' custodian business still needs approval from the CSRC and the SAFE. The CSRC and SAFE would license the first batch of custodians in March and the first batch of QFIIs in April, which will pave way for the start of fund inflow to the QFII scheme by June.

Tax withholding responsibilities of a custodian bank
According to the duties of a custodian, it is responsible for conducting all QFII related foreign exchange settlement, sales, receipt and payment. Under circulars 372 and 66, a custodian should have the responsibilities to withhold relevant taxes which may be imposed on the dividends, interests and gains derived by a QFII in the PRC when the custodian process the remittance of the related foreign exchange payment to a QFII.

Broker
QFII may mandate domestically registered securities companies as a broker to manage their domestic securities investments. Each QFII can only mandate one securities company as its broker.

The requirement for the broker is that it should be a member of either the Shanghai Stock Exchange or Shenzhen Stock Exchange. Its responsibilities would include the trading of the listed securities on behalf of QFIIs according to their instructions and the reporting to the stock exchange if QFII has any violation to regulations in their investment activities.