RQFII is a new policy initiative of the Mainland authorities which allow qualified RQFII holders to channel renminbi funds raised in Hong Kong to invest into the Mainland securities markets. RQFII holders may issue public or private fund or other investment products using their RQFII quotas. The information in the following FAQs is applicable to SFC-authorized RQFII funds available to public investors.

RQFII funds give retail investors access to invest in Mainland's securities markets as they can invest renminbi directly in the Mainland bond and equity markets (including the inter-bank bond and exchange-traded bond market) through the RQFII quotas.

Currently, according to the RQFII regulations, RQFII funds must invest primarily in renminbi bonds and bond funds issued in mainland China. Such investment will consist of at least 80% of the fund's assets. RQFII funds may also invest in China A-shares and other equity investments permitted under RQFII regulations. However, such investment cannot exceed 20% of the fund's assets.

Subscriptions and redemptions of units in the fund must be settled and paid in renminbi.

Before investing, read the offering document and the product key facts statement (Product KFS) of an RQFII fund carefully to understand the key features and risks of the RQFII fund. Should you have any questions about the RQFII fund, please consult your intermediaries (e.g. banks or fund companies) before making any investment.

Like other funds, RQFII funds must be authorized by the SFC before they can be marketed to the public in Hong Kong.

Note: RQFII is granted to Hong Kong subsidiaries of qualified Mainland asset management and securities firms which allows them to channel renminbi raised in Hong Kong to invest in the Mainland securities markets.

The main differences between RQFII funds and other renminbi funds are that all RQFII funds will invest renminbi directly in the Mainland securities markets through the RQFII quotas and they will not invest outside the Mainland.

On the other hand, not all issuers of renminbi funds issued in Hong Kong have the pre-approved RQFII investment quota to invest renminbi directly in stocks and bonds issued in mainland China, and in that case they can only select to invest either in offshore renminbi denominated investments (e.g. dim sum bonds), which choices may be limited, or in non-renminbi assets.

Investors can find out whether a fund's investment is made through a quota (RQFII or QFII) in the offering document and the Product KFS.

Risks relating to the RQFII regime

The RQFII policy and rules have only been recently announced and there may be uncertainty as to its implementation and such policy and rules are subject to change and interpretation by Mainland authorities. The uncertainty and change of the laws and regulations on the Mainland (including the RQFII policy and rules) may adversely impact the RQFII fund.

Risks relating to Mainland markets

The concentration of RQFII fund's investment in securities and bonds issued in mainland China may result in greater volatility than portfolios which comprise broad-based global investments.

Investing in Mainland-related companies and in Mainland markets involve certain risks and special considerations not typically associated with investment in more developed economies or markets, such as greater political, tax, economic, foreign exchange, liquidity and regulatory risks.

There are risks and uncertainties associated with the current Chinese tax laws applicable to investments made by an RQFII fund. Although some RQFII funds may have made tax provision in respect of potential tax liability that may arise from their investments, the provision may not be sufficient or may even be excessive. Any shortfall between the reserves and actual tax liabilities may have to be covered by the fund's assets and may adversely affect the fund's asset value.

Currency risk

Since an RQFII fund is denominated in renminbi, Hong Kong dollar-based investors are therefore exposed to fluctuations in the renminbi exchange rate against Hong Kong dollar. Like any currency, the exchange rate of renminbi may rise or fall.

Renminbi is currently not freely convertible and is subject to exchange controls and restrictions.

Market / investment risk

An RQFII fund is an investment fund product and not a bank deposit. In general, there is no guarantee of the repayment of principal or dividend payment.

The underlying investments of an RQFII fund may fall in value and therefore your investment in the fund may suffer loss even if renminbi appreciates.

Interest rate risk

The value of fixed income instruments is expected to be inversely correlated with changes in interest rates. Any increase in interest rates or changes in macro-economic policies on the Mainland (including monetary policy and fiscal policy) may adversely impact the value of the fund's bonds or debt instruments portfolio.

Credit risk

Investment in bonds or debt instruments is subject to the credit risk of the issuers which may not be able to make timely payments of principal and/or interest. In the event of a default or credit rating downgrading of the issuers of the bonds or debt instruments held by the fund, valuation of the fund's portfolio may become more difficult and investors may suffer a substantial loss as a result.

The RQFII fund may also encounter difficulties or delays in enforcing its rights against bond or debt instruments issuers who will generally be incorporated on the Mainland and therefore not subject to the laws of Hong Kong.

Risks of investing in Mainland bond markets and of unrated or below investment grade bonds

Some of the bonds or debt instruments held by the RQFII fund may be rated below investment grade or may not be rated by any rating agency of an international standard. Such bonds or debit instruments are generally subject to a higher degree of credit risk and a lower degree of liquidity, which may result in greater fluctuations in their values and, consequently, the net asset value (NAV) of the fund.

Risks associated with local Mainland credit ratings

Some of the bonds or debt instruments held by the RQFII fund may have been assigned an investment grade rating by a local credit rating agency on the Mainland. However, the local rating process may lack transparency and the rating standards may be significantly different from that adopted by internationally recognised credit rating agencies.

Liquidity risk

Mainland's bond market is still in a stage of development and the bid and offer spread of renminbi bonds, whether traded in the inter-bank market or listed bond market, may be high and the RQFII fund may therefore incur significant trading costs and may even suffer losses when selling such investments.

In the absence of a regular and active secondary market, the RQFII fund may not be able to sell its bond or debt instrument holdings at prices the fund manager considers advantageous and may need to hold the bonds until their maturity date.

If sizeable redemption requests are received, the fund may need to liquidate its listed bonds or debt instruments at a discount in order to satisfy such requests and the fund may suffer losses as a result.

You should be aware of the following condition during the initial offering of a new RQFII fund:

As the RQFII fund manager can only invest up to the amount of their approved RQFII quota, so the fund manager may close the subscription during (and before the end of) the initial offering period if the total subscription reaches the approved RQFII quota amount.

You should be able to find the latest fund price from your intermediaries (e.g. banks or fund companies), at the fund issuer's website and/or the relevant newspapers as disclosed in the offering document of the fund.

As an investor, you should always understand the nature, investment objective and strategy, key features, fee structure and risks of an RQFII fund. Should you have any questions about the RQFII fund, please consult your intermediaries (e.g. banks or fund companies) before making any investment.

When you invest in a fund, typically there are upfront subscription charges and sometimes redemption charges. Also, there are other ongoing charges such as management fee and trustee fee. You should understand how these fees and charges are charged and calculated, and consider how they may affect your investment return.

A renminbi fund may not necessarily give you the benefits of appreciation in renminbi (if any).

Before you make your investment decision, learn about the product features of the RQFII fund and know your investment objectives. In addition, according to the SFC's Code of Conduct (Note), when SFC licensed persons and registered institutions solicit you or make a recommendation to you in relation to the RQFII fund, they must ensure its suitability for you, taking into account your personal circumstances, such as financial situation, investment experience and investment objectives.

Note: Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission