Schroder Investment Management has set up shop in the Shanghai free-trade zone (FTZ) and Beijing in a bid to capture opportunities in China’s funds industry. And as many as 15 more are making similar moves or considering doing so, a banker told AsianInvestor.
The UK firm established a wholly foreign-owned enterprise (WFOE), Schroder Investment Management Advisory (Shanghai), in late December, and the WFOE in turn set up a subsidiary in Beijing on February 27. The aim is to strengthen client servicing in both cities.
Last year at least 13 foreign asset managers* set up WFOEs in China, according to records from the Asset Management Association of China (Amac) and Shanghai Administration for Industry and Commerce. Such moves have come in response to the rapid growth of China's funds industry and the easing of rules regarding foreign firms and onshore investment.
David Guo, Hong Kong-based head of China business at Schroders, said it was the right time to have local entities in place given China’s rapid progress on opening its markets. "We are not the first firm to set up an onshore WFOE, but we are enthusiastic about our further participation in the local industry,” he told AsianInvestor.
Both the new branches will mainly focus on servicing local institutional investors and intermediary channels in response to their growing demand for global investment. The Shanghai WFOE will also host some research analysts, as the city is China’s key stock-trading centre.
The WFOEs are preparing for further policy relaxation in the asset management industry, including around Shanghai’s qualified domestic limited partner (QDLP) and mutual recognition of fund (MRF) schemes, said Guo. Seven of the WFOEs so far have been set up with a view to making offshore investments under the QDLP scheme.
Schroders has not yet decided to apply for a QDLP licence, though the scheme attracted overseas managers such as BlackRock and Fidelity to set up WFOEs in the FTZ last year.
The launch of MRF was an important factor in Schroders’ decision to set up a WFOE, because an onshore entity can provide better client support for MRF business.
Schroders started offering two Chinese funds, managed by BoCom-Schroders, the firm’s offshore joint venture, in Hong Kong last week under the southbound MRF scheme. It is awaiting approval to sell a Hong Kong-registered fund – the Schroder Asian Asset Income Fund – in China via the joint venture’s distribution network.
UBS Asset Management is another foreign player to be developing a substantial onshore mainland presence, but China chairman Ling Xinyuan told AsianInvestor in December that it did not have plans to participate in the MRF scheme.
WFOEs are 100% owned by a foreign company, thereby circumventing the 49% cap on ownership of domestic fund firms by overseas companies. Historically, the rules around WFOEs in China’s funds industry have been ambiguous because of a lack of clarity about the allowed business scope for such vehicles.
But foreign managers have sought to explore the possibilities of a WFOE in the past two years as the mainland market has opened further.They are allowed to provide investment advisory, consulting, client servicing and research services to institutional and private wealth clients, but not to manufacture products nor manage assets directly. But guidance has not been given on precisely what the permitted activities can entail.
Asked whether regulatory uncertainty was still a concern, Guo said: “We have frequent talks with the regulatory bodies and understand that they have an open-minded attitude towards WFOE entities.”
Chinese authorities announced a further easing of WFOE rules last year during Sino-US trading talks in June and Sino-UK economic and financial dialogue in September, which enabled foreign fund firms’ WFOEs to register with Amac and to operate like domestic private securities investment firms.
So far, UK fund house Aberdeen is the only firm to have received such approval, but it is awaiting details in the registration process. Other foreign managers, such as Fidelity and Templeton, are awaiting further regulatory details.
* The firms in question are Aberdeen, BlackRock, Brookfield, CBRE Global Investors, Deutsche Asset & Wealth Management, EJF Capital, FIdelity, GF Persistent, Nomura Asset Management, Robeco, Russell, Schroders and UBS Asset Management.