Further to the issue by the State Administration of Foreign Exchange of China of the Provisions on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors ("QFII") on 10 June 2018 ("Regulation"), the CSSF has confirmed that a Luxembourg UCITS investing through the QFII quota can now invest up to 100% of its net assets.

Before the entry into force of the Regulation, Luxembourg UCITS were allowed to invest into Chinese assets via the QFII quota but any such investment was limited to 35% of the net assets of the UCITS. The reasoning behind this limitation was the existence of barriers set up for the outbound remittance of capital out of China, which were considered incompatible with the UCITS rules.

The said Regulation has facilitated investments made by QFII (and Renminbi QFII (RQFII)) by removing, among other things, the three-month lock-up period and the cap on monthly outbound remittance by QFII out of China. The removal of these restrictions will increase the liquidity of investment in the PRC's1 capital markets through this quota.

The CSSF has confirmed that a UCITS can now invest up to 100% of its net asset into Chinese markets through the use of the QFII quota. The Chinese tax rules for outward remittance, however, have to be analysed on a case-by-case basis.

With the DVP2 issue resolved for Bond Connect, there are no longer specific percentage limits for Luxembourg UCITS to invest into the Chinese stock and bond markets via the various channels provided the adequate disclosures are included in the sales documents.

Footnotes

1. PRC means People's Republic of China.

2. DVP means Delivery Versus Payment.

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