At least 10 international fund houses are seeking licences under Shanghai's qualified domestic limited partnership (QDLP) programme, one of China's cross-border investment schemes, according to a survey by Standard Chartered of some 900 industry participants globally.
This comes amid relatively slow take-up of another cross-border investment scheme – the Hong Kong-China mutual recognition of funds (MRF) programme – and as fund managers have shifted away from the traditional joint-venture approach for accessing mainland assets and clients. Shanghai's QDLP scheme is seen as being more cost-efficient.
QDLP is becoming a feeder-type structure for Chinese investors into global funds, such as Luxembourg-domiciled products, said Barnaby Nelson, managing director of investors and intermediaries for Northeast Asia and Greater China at Standard Chartered.
The programme was originally for private equity and other alternative investments, but it has become increasingly used for mainstream funds, he added. QDLP has the advantage of being cost-efficient, Nelson noted, as foreign asset managers usually set up a five-strong team in Shanghai and launch funds to sell to mainland clients.
It was launched by the Shanghai municipal government in 2013 to allow offshore hedge fund managers to raise assets in renminbi from Chinese wealthy and institutional investors to invest into their overseas flagship funds. It has expanded quickly in the past year, and firms such as BlackRock, Deutsche Asset Management, Nomura AM and UBS AM have secured licences and quota.
At least 15 foreign managers* are estimated to have joined the scheme already, but the number is likely higher, as the Shanghai Financial Services Office does not disclose names of licensed managers.
QDLP quota approval was reportedly halted in March, but Nelson said foreign managers have been getting more optimistic recently. “A lot of people who went to Shanghai recently were happy about the feedback, so I believe there is good news to come,” he said.
Several foreign managers in application expect to receive QDLP quota approval in the near future because curbs on outbound flows from China have eased recently, he added.
The northbound leg of the MRF scheme (Hong Kong funds being sold into China) is another potential access point to Chinese investors, but regulatory hurdles have led managers to tread carefully and resulted in slow take-up, Nelson said.
The traditional avenue of setting up a sino-foreign joint venture has fallen out of favour with foreign managers, but several Taiwanese fund houses see these structures as a “safety net”. Overall, 35% of the survey respondents said mainland joint ventures are “less important” or “not important”, while 38% said it was “essential to business strategy” or that it “remains important”.
The report cited a participant saying a JV was a backup plan for when other structures fail, though it was not necessarily the first choice for mainland access.
Meanwhile, Singapore-based fund firms are less keen on this structure and prefer a “go it alone” plan in China – one reason being that they find it difficult to obtain a suitable, long-term partner.
Foreign managers will still need a domestic partners if they aim to access retail investors, but if they aim for wealthy and institutional clients, they have new options now, he added.
*QDLP-licensed foreign managers include Oaktree, Canyon, Winton, Och-Ziff, Citadel and Man Group, which were approved in 2013. Others are Deutsche Asset Management, Nomura AM, EJF Capital, CBRE Global, UBS AM, BlackRock, Value Partners, CIFM and GF Persistent Overseas, which were approved last year.