US fund house Franklin Templeton has unveiled its wholly foreign-owned enterprise (WFOE) in Shanghai’s free trade zone and is considering launching an onshore investment management unit to manufacture products onshore.
Franklin Templeton Investment Advisory (Shanghai) received the municipal government’s approval in late March, allowing it to conduct investment advisory business in China.
The WFOE is chiefly a platform to service Chinese institutional clients with significant appetite for overseas exposure, such as sovereign wealth funds and insurers, said David Chang, Hong Kong-based chief excecutive for Greater China at Franklin Templeton. He added that the firm would look into launching private funds through the new entity in the near future.
To offer private funds to domestic investors, foreign managers will need to obtain the Chinese government’s permission to set up an investment management specialist WFOE and register with the Asset Management Association of China (Amac). This would allow the business to operate as a private fund manager to manufacture onshore products and invest directly in mainland capital markets.
Chang said Franklin Templeton was evaluating the possibility of registering as an investment management WFOE, although the authorities have not yet clarified the details of the rules.
Moreover, Templeton’s new WFOE was set up amid uncertainty over such applications, as both the Beijing and Shanghai municipal governments have suspended registrations of new investment firms, the former in January and the latter in April.
The latest move in China’s crackdown on illegal peer-to-peer lending and fundraising activities came on May 18, when the China Securities Regulatory Commission unveiled proposals to tighten the capital rules for mainland fund houses’ segregated-account subsidiaries. The aim is to get them to shift away from shadow-banking activity and more into active investment management.
Lawyers and consultants told AsianInvestor that setting up mainland WFOEs was getting more difficult but that the window had not totally closed, as reported. The pace of WFOE approvals have slowed recently after investment registrations were halted, said January Sun, a senior associate at Z-Ben in Shanghai.
Three foreign asset managers – Aberdeen, Bridgewater and Fidelity – obtained permissions for investment management WFOEs pending their registration with Amac.
The world’s largest hedge fund manager, Bridgewater, set up an investment management WFOE in Shanghai on March 7, while UK fund house Schroders established WFOEs in Shanghai last December and in Beijing in February. Aberdeen and Fidelity set up their IM WFOEs last September.
At least 35 WFOEs have now been set up since 2011, but the actual number is believed to be significantly higher than that, a lawyer told AsianInvestor. Thirteen of the 35 are in the Shanghai FTZ.