Beijing’s latest pledge to gradually raise the 49% cap on stakes held by foreign financial firms in mainland fund and securities companies has created yet another incentive for overseas players to review their China businesses.
The long-awaited plan was announced jointly during last week’s US-China Strategic and Economic Dialogue in Beijing by the US Treasury Department and the mainland authorities.
Related rule changes are likely to start within the coming 12 months, said Ivan Shi, head of research at Shanghai-based consultancy Z-Ben Advisors.
Beijing’s long-awaited commitment comes in addition to other new channels for accessing the mainland market, such as wholly foreign-owned enterprises (WFOEs), as the environment for investing into China has evolved quickly over the past couple of years.
Foreign firms may well utilise several of these options for developing their China businesses rather than picking one over another, suggested Shi. He said rule changes were likely to be introduced in the coming 12 months, likely starting with a small pilot programme incorporating a few JVs, before being applied nationwide.
Fund executives welcomed the move, but were non-committal about their likely plans.
“Any additional option provided to foreign managers is valuable,” said Cheng Tan-Feng, Hong Kong-based head of Greater China at BNP Paribas Investment Partners (BNPP IP), which owns 49% of Shanghai-based HFT Investment Management.
The option would provide more flexibility over whether to build up a wholly foreign-owned entity, for example, or to change the holding in the JV, he noted
Others have said they would increase their holdings in mainland JVs once the market opened, one being UBS Asset Management, which owns 49% stakes of UBS SDIC Fund Management. Ling Xinyuan, UBS AM’s China chairman, said the Swiss firm and SDIC would jointly manage the JV once the cap was raised, when discussing the firm’s China strategy in January.
Last week's commitment is part of efforts to develop China’s immature securities industry after the stock market rout last year. Beijing recognises that foreign participation in the securities and fund management sectors can boost competitiveness and international influence in the industry, said the joint release.
BNPP IP’s Cheng agreed that introducing international standards of operation and governance would be beneficial for local fund companies.
Foreign fund houses have been allowed to hold 49% of a Chinese joint venture since 2004, three years after the country joined the World Trade Organisation. Before that the cap was 33%. Then in 2014 the China Securities Regulatory Commission (CSRC) said it would relax the limit in the future, but had not provided any update since then.
However, overseas players may still need to wait for Chinese capital markets to open fully before they see the full benefit of Beijing’s commitment.
Hong Kong-based financial firms, meanwhile, have been able to set up a JV with a majority-control stake since August 2013.
Hong Kong-based Hang Seng Bank received approval in July last year from the CSRC to establish a JV, Hang Seng Qianhai Fund Management, with a 70% holding in Qianhai. The bank started the application process in September and is awaiting the official green light.
Another significant move during the China-US meeting last week was the US receiving its first Rmb250 billion ($38 billion) in quota under the renminbi qualified foreign institutional investor (RQFII) scheme. Such changes are part of Beijing’s push for mainland A-shares to be included in MSCI’s influential global emerging market stock indices, as reported.
During the Sino-US talks, Beijing also said it would provide details of the requirements for WFOEs to register as private fund firms, without giving any indication of when they would be announced. WFOEs have become a popular way for foreign firms to access the mainland fund industry, while traditional JV partnership have fallen out of favour.
China pledged to allow foreign asset managers’ WFOEs to engage in private fund management business after registration with the Asset Management Association of China during talks with the US in June last year and the UK in September.
Fidelity, Bridgewater and Aberdeen are the three foreign firms to have set up investment management WFOEs, but they are awaiting regulatory details and clarification from Amac. Franklin Templeton is considering seeking approval for an entity.