China's regulators are to allow wholly foreign-owned enterprises (WFOEs) to invest in Hong Kong-listed stocks and provide clearer rules on interbank bond investing so that they can compete more fairly with domestic players.

The new policies, rolled out under the guidance of the China Securities Regulatory Commission (CSRC), send a strong signal to the international market that China is opening up the asset management industry, the Asset Management Association of China (Amac) said on August 9.

“Their investment scopes have been enlarged, enabling them to compete in almost the same way as domestic fund houses … this is a good thing,” Rachel Wang, director of Chinese fund manager research at Morningstar, told AsianInvestor.

By creating a more level playing field, it could help to attract more foreign managers to establish themselves in China, which will help drive competition and lead to more quality products for investors, she said.

When WFOEs first entered the mainland Chinese market the regulator barely allowed them to invest in interbank bonds. They couldn’t invest through stock connect schemes either, which meant they were treated differently to domestic asset managers, an analyst at a Shanghai-based consultancy firm, told AsianInvestor on condition of anonymity.

But the new rules open up new investment avenues and dovetail with the CSRC's moves to enable WFOEs to eventually launch their own mutual funds, he added.

The securities regulator said last month that wholly foreign-owned fund management companies are to be allowed in China from 2020 – a year ahead of schedule.

At present, global fund firms have to set up investment management WFOEs in China and obtain private fund management (PFM) licences from Amac before they can launch private funds to high net worth individuals and institutional investors. They aren't allowed to offer mutual funds to retail investors but will be able to do so once they evolve into wholly foreign-owned fund management companies.

Since 2017, 21 WFOEs have been granted these PFM licences, registering 46 private funds with total assets of Rmb5.4 billion ($766.73 billion), according to Amac.

LARGER SCOPE

Amac will now “specify” the standards for WFOEs to invest in the interbank bond market. Moreover, they can now participate in the stock-connect schemes between Hong Kong and Shanghai and Shenzhen.

Previously, some WFOEs could theoretically invest in interbank bonds but were unsure on how to get clearance or on the restrictions that might be placed on them. But now clear standards will be given, Wang said.

This is important as nearly 90% of the bonds on the onshore market are interbank bonds, while the rest are exchange-traded bonds, she said.

Moreover, WFOEs will now be allowed to invest in the Hong Kong stock market through the connect schemes. Previously they could only use A-shares as the underlying asset of their equity products, now it’s enlarged to include Hong Kong stocks.

“Foreign asset managers have more obvious advantages in Hong Kong stocks,” she said. “It’s because what they are best at may not be A-share investments but the global investment expertise accumulated after years of experience.”

They will have more choices over the underlying assets they can package in their funds, leading to more product diversity, the unnamed Shanghai-based analyst said. 

Amac also said that qualification exams in English will be offered to expats working in WFOEs who are senior executive or investment managers, a move that would allow more foreign talent to enter the China market. 

Investors interested in the strategies of China’s asset owners can learn more at AsianInvestor's sixth Institutional Investment Forum China on September 18 in Beijing. Please click here for more details.