China has been opening up its investment industry at such a rapid pace in recent years that the next development could come in any number of areas.
Two areas on which international asset managers are eagerly awaiting updates concern the scope of activities of wholly foreign-owned enterprises (WFOEs) and the qualified domestic limited partnership (QDLP) scheme.
A rising number of foreign fund houses have received or are seeking a licence to set up a WFOE, but they want more clarity on whether private fund management WFOEs (PFM-WFOEs) will be able to run mutual funds. Fidelity International last week became the first foreign fund manager to be given a PFM-WFOE licence.
International firms are also waiting for the authorities to review new QDLP applications and for potential rule changes under the scheme, which allows the set-up of feeder funds to raise renminbi to invest into overseas products.
New QDLP rules
As it happens, Shanghai’s Financial Service Office (FSO) has drafted new QDLP rules, but has not yet issued them to foreign managers, said a Shanghai-based lawyer who requested anonymity. It may do so after Chinese New Year (January 28), he said.
The Shanghai FSO plans to allow foreign managers to set up a holding company structure for their WFOEs, so that they can consolidate their onshore presence under one entity, the lawyer noted. This would help reduce operating costs.
Shanghai (pictured left) aims to attract global fund firms to set up their regional headquarters in Shanghai to promote the city as an asset management centre, he added.
SFSO could not be reached for comment by press time.
Foreign managers had been expecting Shanghai to introduce rule changes for the QDLP scheme this year. They are also still hoping that China's State Administration of Foreign Exchange will start handing out new quota under both the QDLP scheme and another outbound investment programme, the qualified domestic institutional investor (QDII) scheme. The foreign exchange regulator suspended such approvals more than a year ago.
Waiting on WFOEs
When it comes to WFOE licences, the next step is whether foreign fund managers’ private fund management WFOEs (PFM-WFOEs) will be allowed to apply for mutual fund firm licences, said Ge Yin, a Shanghai-based counsel at UK law firm Clifford Chance.
Under the current rules, a PFM firm that satisfies certain requirements, including a three-year track record as an onshore PFM, can apply for a mutual fund licence, allowing it to launch products for domestic retail investors.
However, it is not yet clear whether this policy will automatically apply to PFM-WFOEs, Ge told AsianInvestor. That would be a big step for Chinese fund industry liberalisation, she said. “Many of my clients are aware of this possibility, but I need to manage their expectation so that they do not take it for granted."
The China Securities Regulatory Commission approved Pengyang Asset Management as the first PFM to receive a mutual fund licence in July. However, the green light came three years after the industry watchdog revised the New Fund Law in 2013 to allow such approvals.
The speed of liberalisation of WFOE rules last year surprised many market observers, but foreign managers must keep an eye out for regulatory changes in respect of their joint-venture holding limits.
Beijing pledged to gradually raise the 49% cap on stakes held by foreign financial firms in mainland fund managers during the US-China Strategic and Economic Dialogue in June, a year after China committed to allowing WFOEs to be set up.
Clifford Chance’s Ge said the regulator would not allow PFM-WFOEs to conduct public fund business in China until they were comfortable lifting the foreign ownership limits on local mutual fund management JVs. Hence the opening of the mutual fund industry is expected to come in concurrently with WFOE liberalisation, she noted.
Hong Kong’s Hang Seng Investment Management is the only foreign firm allowed to hold a majority (70%) stake in its Shenzhen-based JV fund firm, which received approval in June. Whether such a privilege will be extended to foreign managers outside Hong Kong is another question for the coming year.