Q:What is QFII?

A: On November 5, 2002 the China Securities Regulatory Commission (CSRC) and the People's Bank of China (PBOC) introduced the QFII (Qualified Foreign Institutional Investor) program as a provision for foreign capital to access China's financial markets.

Chinese QFII regulations relax some capital controls and allow foreign institutions to invest in RMB-denominated equity and bond markets. Indeed, QFII is a Chinese 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 not only further opens China's securities markets ¡§C but also gives foreign investors an opportunity to take position on those markets and buy stakes in Chinese companies, thus sharing in China's phenomenal growth. QFIIs can provide their clients with added opportunities to share in the growth of the Chinese Market.

As of October 14, 2004 a total of 25 foreign institutions have received QFII licenses with quotas ranging from $50 million to $800 million, amounting to more than $2.8 billion authorized for investment in the Chinese markets. China's market capitalization of $500 billion is increasingly attracting foreign investors and around 10 other foreign institutions have submitted applications and CSRC approval is pending.

Q: What financial instruments can a QFII invest in?

A: 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 shared 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.

Q:Who can become a QFII?

A: Overseas fund management institutions, Insurance companies, Securities companies, 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

Q:Who oversees the QFII Program?

A: The China Securities Regulatory Commission (CSRC) and State Administration of Foreign Exchange (SAFE) are the regulators of the securities investment activities conducted by QFIIs. 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.

The QFII applicant must meet the following criteria:

Sound financial and credit statusRisk control indicators meet the requirements set by laws and securities authorities under applicant's home jurisdiction

Sound management structure and internal control system

If a fund management institution:

It must have operated its fund business for over 5 years with the most recent accounting year managing assets of not less than $10 billion

If an insurance company:

It must have operated its insurance business for over 30 years with paid-in capital of not less than $1 billion and manage securities of not less that $10 billion in the most recent accounting year.

If a securities company:

Must have operated securities business for over 30 years with paid-in capital of not less than $1 billion and manage securities assets of not less than $10 billion in the most recent accounting year.

If a commercial bank:

It must rank among the top 100 of the world in terms of total assets for the most recent accounting year and manage securities assets of not less than $10 billion.

Under new regulations, currently waiting approval by the CSRC, requirements on investor's qualifications, border securities and investment percentage, capital remittance and sub-account opening will be downgraded¡§C allowing more QFII's to enter the market.

Application Process

The applicant must mandate a custodian and a broker for their securities trading. The elected custodian files the application for QFII qualification and investment quota to the CSRC and SAFE respectively. The current QFII investment quotas range from $50 million to $800 million. There are currently 11 banks in China that are qualified for the custodian business. They include 7 Domestic Qualified Custodians: Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of Communications, China Merchants Bank, China Everbright Bank

4 Foreign Qualified Custodians

Standard Chartered Bank, HSBC, Citibank, Deutsche Bank. The custodian bank offers securities and cash clearing services to QFIIs that have received authorization from Chinese regulators. A custodian acts as the primary communication channel between the QFII and the Chinese authorities. They service foreign exchange and cash settlement needs of the QFIIs and are in charge of the safekeeping of securities, receiving of dividend and interest payments, and reporting to the CSRC and SAFE about the status of the account and compiling the QFII's annual report.

After obtaining approval from the CSRC and the investment quota from SAFE, the QFII must remit into China within 3 months the full amount of its initial investment in foreign currency in accordance with the quota set my SAFE. This capital is then converted into RMB and deposited with the custodian.

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