US fund house Franklin Templeton is considering setting up a wholly foreign-owned enterprise (WFOE) in mainland China in a bid to meet local institutional demand.
It is a further reflection of the evolution of foreign managers’ Greater China business models, in response to the pace of change and growth in the asset management industry.
David Chang, CEO and regional head for Greater China at Franklin Templeton Investments, outlined to AsianInvestor the potential benefits of a WFOE.
“A WFOE is a potential servicing platform for onshore institutional clients, including sovereign wealth funds and insurance companies with a higher appetite for overseas investments,” Chang said.
“Currently, our existing representative office is unable to meet clients or to engage in client servicing activities, except to function as a contact point. This model is not sufficient to meet the growing demands of Chinese institutional investors in the long run.”
Chang said the firm has been analysing the practicalities of establishing a WFOE, but neither an office launch date or location have been confirmed.
“Recent regulatory changes allowed Chinese institutional investors to increase their overseas exposure,” Chang said. “We saw the opportunity three years ago before mainland rules and regulations were relaxed.”
WFOEs are 100% owned by a foreign company, avoiding the 49% cap on ownership of domestic fund firms imposed on overseas managers. They are not allowed to manage money or launch products, but they can perform investment advisory, consulting, client servicing and research roles for institutions and private investors.
In the past, WFOEs were seen as a grey area because there were no black and white rules about the business scope; thus, only small, foreign boutique firms chose this route to access China.
Now, global players are more likely to consider a WFOE due to the rapid pace of liberalisation taking place. For example, French firm BNP Paribas Investment Partners set up a WFOE in the Shanghai free-trade zone last December. Hong Kong based-Value Partners’ WFOE has targeted private clients, while US-based Russell has sold its stake in its joint venture with Ping An but set up its own WFOE in Shanghai.
In a Sino-US talks late last month, China allowed global managers’ mainland WFOEs to operate on the same basis as domestic private funds, meaning they will able to manufacture and market their own products, as reported.
“This is a milestone in China’s economic development," said Chang. "The trend to liberalise China’s capital market and to internationalise the renminbi seems to be irreversible.
“Although the WFOE rules are not crystal clear yet, we believe the risks are limited because China is likely to further liberalise rather than moving backward.”
Templeton now operates a representative office in Beijing, a research office in Shanghai and a joint venture - Franklin Templeton Sealand Fund Management - in Shanghai.
Chang stressed that the potential WFOE would not replace its existing joint venture, but each would complement the other. Templeton was satisfied with the JV partnership with Sealand Securities, he said, and had plans for greater cooperation under Hong Kong-China mutual recognition, which went live on July 1.