Wholly foreign-owned enterprises (WFOEs) in China got the go-ahead on Thursday (June 30) to set up as onshore private fund firms. The three existing investment management WFOEs – established by Aberdeen, Bridgewater and Fidelity – are expected to be the first to register.

Such rapid opening of China’s fund industry to foreign firms was unexpected, Sandra Lu, a Shanghai-based partner at Llinks Law, told AsianInvestor

The China Securities Regulatory Commission (CSRC) sees allowing participation by foreign asset managers as a way to improve standards and competitiveness among domestic players, through exposure to foreign managers’ business models, strategies and compliance.

Meanwhile, the CSRC has been clamping down on domestic private fund managers with the aim of tackling illegal fundraising and shadow banking. At the same time many mainland fund houses are looking to build businesses offshore and seeking licences to operate in Hong Kong and, in some cases, Singapore

The Asset Management Association of China (Amac) has published more details about the requirements and process for WFOE registration. For example, an investment management WFOE or JV private fund firm and their parent company should not have a record of any major regulatory penalties (what constitues 'major' is unclear)The foreign owner must also be a licensed financial firms in one of the 63 countries that have signed a memorandum of regulatory cooperation with China.

The regisgration process will be similar to that for domestic private fund firms, although WFOEs and JV private fund firms must obtain a legal opinion to confirm whether the entities and their foreign owners satisfy Amac’s requirements. All registered WFOEs will be regulated under the private fund rules issued in 2014. 

The State Administration for Industry and Commerce could not previously register WFOEs, except in the special cases of Aberdeen, Fidelity and Bridgewater. These three special WFOEs have received Beijing’s nod for investment management business, but were awaiting clarification of the rules.

Other foreign asset managers, including Franklin Templeton and Schroders, have opened their general consulting WFOEs in Shanghai, but they can now upgrade those businesses to investment WFOEs to seek registration with Amac. That means changing their company names and satisfying different requirements around capital registration, operations and internal compliance, Lu said. 

Aberdeen, Fidelity and Bridgewater are thought likely to be the first batch of foreign managers’ WFOEs to register with Amac, as their WFOEs’ names already contain terms such as “investment management” or “wealth management”. The rule about company names is important because of the issues the authorities have experienced with firms setting up as private fund firms to raise capital without managing money or having any intention to do so.

Once they register with Amac, WFOEs will be allowed to manufacture private products invest in onshore capital markets and manage money for domestic wealthy and institutional investors. But such capital should not involve cross-border flows; that is, they cannot invest offshore.

This latest move comes after Beijing pledged to provide details of requirement during talks with the US talks last month, a year after China said it would allow foreign asset managers’ WFOEs to engage in private fund management business

Beijing also said in early June that it would gradually raise the 49% cap on stakes held by foreign financial firms in mainland joint-venture fund houses.