The first batch of foreign asset managers look set to register their wholly-owned onshore vehicles as private fund firms in China within the next two months, according to a lawyer with good knowledge of the matter. Such a move would enable firms to launch investment products under their own brand name.
“We just hope in the very near future, perhaps in the next one or two months, there will be a few fund managers who will get the private fund licences in China,” Sandra Lu, partner of Llinks Law Offices, speaking at a panel of the Hong Kong Investment Funds Association annual conference yesterday in Hong Kong.
“I was told by Amac [the Asset Management Association of China] and CSRC [the China Securities Regulatory Commission] that in the past half year, some 20 foreign asset managers have clearly showed their interests in setting up a WFOE [wholly foreign-owned enterprise] in China to do the private fund management business,” Lu said.
China first pledged foreign fund firms the full access to the domestic private fund industry via WFOEs in July 2015. Aberdeen Asset Management and Fidelity were the first to establish investment management WFOEs (IM-WFOEs), in September and October 2015, respectively.
An IM-WFOE is the appropriate vehicle for foreign asset managers to conduct investment activites in China's markets such as buying and selling equities and bonds for qualified local investors. These are typically high net worth individuals and institutional investors. There are several other types of WFOE as well, including ones focused on real estate, investment advice and research.
However, an IM-WFOE licence alone does not let foreign fund managers create and sell local products under their own brand name. To do so the vehicles are also required to register with Amac as private fund firms, but CSRC only granted permission for the IM-WFOEs to begin doing so in June.
Industry observers expect Aberdeen IM-WFOE to successfully register with Amac and become the first foreign wholly owned private firm in China, able to issue products under its brand name. During the economic and financial dialogue between China and UK last month, the CSRC and Amac said they both support Aberdeen to register and launch its own private fund product.
The first successful registrants are likely to begin launching vanilla equity and fixed income funds, based upon local financial instruments.
Several fund managers are set to follow Aberdeen and Fidelity and register with Amac, having already established their own IM-WFOEs over the past year. They include Bridgewater Associates, JP Morgan Asset Management, Vanguard, Neuberger Berman, Korean firms Hanwha Asset Management and Mirae Asset Global Investments. The latest example will be German firm Allianz Global Investors, which received its IM-WFOE on December 6.
Despite the regulation relaxation, some foreign managers note the difficulty in executing their China plans via WFOE route, because they have to comply with recently altered local private fund rules and WFOE requirements.
The CSRC introduced new rules in February that tightened the requirements for domestic private funds firms, and these criteria now also apply to IM-WFOEs planning to register with Amac. For example, the securities regulator requires private fund managers to launch their first product within six months of the registration as a private fund firm with Amac, and they also need to have an investment team and distribution partners full established before registering with the fund association.
In addition, there are personnel requirements. Foreign fund managers are required to base the senior executives of the private fund firms in China, including the chief executive officer and the chief compliance officer. This is so they can work directly with the Chinese regulators, Lu said.
These stipulations help explain why some foreign firms are not keen to set up an IM-WFOE or upgrade other types of WOFE to become an investment management unit.
One example is Dutch firm Robeco. Michael Lu, managing director of Robeco’s Shanghai advisory WFOE, said domestic private fund firms will need to implement independent onshore trading system which would raise operating costs and require his company to change its internal structure in China. This could mean some foreign firms take some extra time before deciding to register their IM-WFOEs as private fund firms.
Amac and CSRC do not insist upon a specific amount of capital that foreign asset managers need to have to set up an IM-WFOE in China. However, managers will need to submit a justification to Amac that they have sufficient capital to support the operations of their WFOE, Lu said.
“The first point is you need to have a very clear idea what the business is that you are going to conduct in China,” she added.