Access to China – An Overview of China’s Asset Management Market

1. Cross border programs

Listed below are the main programs/regimes available to foreign fund managers:

1.1 QDLP

The Qualified Domestic Limited Partnership (QDLP) is a pilot program developed by Chinese local authorities (i.e. Shanghai and Tianjin). It allows foreign asset managers to raise RMB from wealthy and institutional investors in China for overseas investment. It is a program common in Shanghai and which also exists in Tianjin.

Under the QDLP program, foreign asset managers can establish an investment entity in China as a general partner. They can also set up a Qualified Domestic Investment Fund (RMB Fund Enterprise, featuring as a feeder fund) to feed into the master fund managed by an overseas management group. This pilot program requires the RMB Fund Enterprise to appoint a qualified commercial bank as a custodian bank, which will operate the business of RMB and foreign exchange settlement within the quota approved by the authority.

1.2 QFII/RQFII

The Qualified Foreign Institutional Investor (QFII) Scheme is a transitional arrangement which allows institutional investors who meet certain requirements to invest in a limited scope of cross-border securities products. QFIIs do not need to incorporate a local entity in China.

Foreign investments in China are restricted due to foreign exchange controls. The quota, products, accounts, and fund conversions are strictly monitored and regulated.

The RMB Qualified Foreign Institutional Investor (RQFII) is a program similar to the QFII program which allows qualified overseas investors to deploy overseas RMB in domestic investments.

The issues with QFII/RQFII are that i) the scope of investment is limited to China’s secondary market (but not the primary market or real estate market) and ii) that both the inflow and outflow of foreign exchange are subject to quotas.

1.3 CIBM/Bond Connect

The China Interbank Bond Market (CIBM) is an OTC market that provides a route for international investors to access fixed income products available in China, and is usually regarded as supplementary to QFII and RQFII schemes.
CIBM investors are required to go through a series of procedures to comply with the foreign exchange/clearing and settlement requirements. For instance, CIBM investors are required to register, file and open special RMB accounts with the People’s Bank of China (PBOC), and open a bond account and a Delivery Versus Payment cash clearing account with the China Central Depository and Clearing Co. Ltd. and the Shanghai Clearing House.

On the other hand, Bond Connect is a recently launched channel with greater efficiency and convenience which enables Mainland and offshore investors to trade bonds on the Mainland and Hong Kong bond markets.

Unlike CIBM, which requires foreign institutions to complete the necessary filing and account opening procedures, offshore investors under the Bond Connect scheme are permitted to make use of their existing accounts in Hong Kong to directly access the Mainland bond market, and thus avoids the need to deal with Mainland authorities for market entry, trading qualifications, foreign exchange settlement and other issues.

Comparing the two, CIBM has a wider investment scope than Bond Connect, but in terms of trading and settlement procedures and standards for trading documents (NAFMII vs. ISDA standards), CIBM is not as “user friendly” as Bond Connect to foreign investors.

1.4 Private securities investment fund (WFOE PFMs)

In 2016, the Asset Management Association of China (AMAC) unveiled new rules allowing WFOEs to engage in private securities investment fund management businesses.

Under the PFM program, a foreign asset manager is allowed to establish a WFOE or a joint venture which serves as a private fund manager. Then the private fund manager can raise an open-ended fund targeted at PRC qualified investors, ie, a private securities investment fund as defined under Chinese rules, structured as a contractual type fund. The manager and the custodian are the de facto co-trustees of the private fund.

A private securities investment fund can invest in securities issued in China, including the stocks of companies limited by shares issued publicly in China, bonds, fund units and other securities and derivatives recognized by the China Securities Regulatory Commission (CSRC).

However, private securities investment funds may not invest in securities issued outside of China except that, in the future, they may be allowed to participate in the sale and purchase of specified foreign stocks through stock connect programs and QDII qualification and quota.

There is one CSRC rule which allows financial institutions and related asset management products to invest in private securities investment funds as qualified investors 1. However, further clarity on how these rules apply in practice is required. We have listed several of these asset management plans /collective investment schemes launched by different financial institutions in Schedule 1, which in theory are all possible qualified investors for a PFM fund managed by a foreign asset manager.

1.5 QFLP

QFLP (Qualified Foreign Limited Partnership) is a pilot program developed by various local authorities (eg Tianjin, Beijing and Shanghai).

The QFLP program was envisaged to test the effects of granting foreign investors limited access to China’s domestic private equity market. QFLP provides more favourable treatment to foreign PE fund managers and institutional investors with respect to FOREX settlement. Under the QFLP program, a WFOE or a Sino-foreign joint venture established by a foreign PE fund manager will raise a fund in the form of a partnership and invest domestically.

Regardless of the source of funding, funds raised under the QFLP program will still be treated as a foreign fund and thus the portfolio investment is subject to certain foreign shareholding restrictions.

1.6 Foreign-invested venture capital enterprises

Foreign-invested venture capital enterprises (VC Enterprises) are a special form of foreign-invested enterprise. They are usually established as a joint venture between two to fifty shareholders. It should also be noted that VC Enterprises can be established in non-legal person form.

Foreign-invested venture capital enterprises primarily make private equity investments in pre-listed, high-technology enterprises, and provide management services. In practice, a foreign-invested venture capital enterprise can also invest in other types of enterprises outside of the high-tech sector.

There must be at least two shareholders in a foreign-invested venture capital enterprise, with one functioning as the GP who exercises a management and supervisory role. The law imposes certain requirements on the GP-like shareholder of a foreign-invested venture capital enterprise.

Recent tax regulations grant tax incentives to foreign-invested venture capital enterprises when they make certain qualified investments.

1.7 Foreign-invested Holding Companies

A Foreign-invested Holding Company is a holding company established by a foreign investor or a number of foreign investors that are engaged in portfolio investment in China. A WFOE is the legal form that is often used for the establishment of a Foreign-invested Holding Company.

A Foreign-invested Holding Company is widely used by foreign investors for regional cash pooling, holding and managing their investments in China and consolidating back office support to various investment portfolios. There are a series of regulations in place to incentivise foreign investors to establish a Foreign-invested Holding Company, such as the flexibility in re-investment, increased leverage ratio, enhanced tax efficiency and etc.

Schedule 1

2. Asset management Products/Plans

2.1 Subsidiaries of (mutual) fund management companies

Subsidiaries of (mutual) fund management companies are a type of entity regulated by the CSRC. Since 2012, the CSRC has allowed mutual fund management companies to set up subsidiaries (“Asset Management Company Subsidiaries”), which were created as investment channels to access almost all types of asset classes. Such companies are allowed to invest in interbank, exchange trade products and unlisted securities (equity, bonds, etc.).

On one hand, such arrangement allows Asset Management Company Subsidiaries to overcome the existing investment restrictions for banks, trusts and insurance companies; on the other hand, it also makes the subsidiary of a mutual fund company an ideal target for so-called channel business (ie multi-layering asset management products) in China. Asset Management Company Subsidiaries currently face stringent regulation 2.

2.2 Managed Accounts

Managed Accounts are a type of product regulated by the CSRC. Mutual fund management companies are allowed to set up managed accounts for specific clients. Its investment scope is limited to cash, deposits, stocks, bond, securities investment funds, PBOC bank notes, financing instruments issued by non-FI enterprises, asset-backed securities, commodity futures and other financial derivatives. It is not allowed to invest into trust or equity interest in unlisted companies.

2.3 Asset management products launched by securities firms

Asset management products launched by securities firms are regulated by the CSRC. Subject to the CSRC’s supervision, a fully-licensed Chinese securities firm may launch collective asset management plans through private offerings and act as the asset manager.

Collective asset management plans launched by securities companies cover a wide range of investment scope, except for loans, equity interest in unlisted companies or real estate.

2.4 Trust companies

Trust companies are a type of entity regulated by the CIRC. Trust companies incorporated in China can offer, on a private placement basis, collective investment schemes as unit trusts, to “accredited investors” (which interestingly adopt slightly different standards from those applicable to private funds issued by CSRC/AMAC). A collective investment scheme launched by a trust company can invest into almost all types of asset classes in China subject to certain investment restrictions imposed by the CIRC.

2.5 Asset management plans launched by futures companies

Asset management plans launched by futures companies are a type of product regulated by the CSRC. They are similar to managed account products launched by mutual fund management companies.

2.6 Insurance asset management companies

Traditionally, insurance asset management companies (Insurance AMCs) in China only provided asset management services to their insurance group companies. With a view to widen the investment functions of such insurance asset managers, CIRC now regards Insurance AMCs as professional third party asset managers, whose responsibilities are to manage funds entrusted to them by principals.

In recent years, the CIRC has lifted a number of investment restrictions on insurance funds managed by Insurance AMCs (Insurance Funds) and has provided greater flexibility in asset allocation. These rules enable insurance AMCs to gain exposure to real estate markets, unsecured corporate bonds and unlisted companies, as well as infrastructure projects and equity investments. Such investment activities are also currently facing stricter scrutiny because of the new rules that regulate the asset management industry.

2.7 Wealth management products of commercial banks

Commercial banks in the PRC are generally prohibited from dealing directly in securities or entering into commodity future transactions. However, by complying with specific regulations, commercial banks may be able to get indirectly involved in certain types of securities trading or derivative transactions by offering wealth management products to retail clients in China.

1 Specifically, the following entities and products can be considered as institutional investors:

1. Financial institutions formed with the approval of the relevant financial regulatory authorities, including securities companies, futures companies, fund management companies and its subsidiaries, commercial banks, insurance companies, trust companies and finance companies etc., as well as subsidiaries of securities companies, subsidiaries of futures companies and privately fund manager that registered with AMAC;
2. “Wealth management products” issued by the aforesaid institutions to investors, including but not limited to the asset management products/plans of securities companies, asset management products/plans of (mutual) fund management companies and their subsidiaries, asset management products of futures companies, wealth management products of commercial banks, insurance products, trust products and private securities funds products that filled with AMAC.

2 The People Bank of China (PBOC), China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), China Insurance Regulatory Commission (CIRC) and State Administration of Foreign Exchange (SAFE) jointly released a consultation paper on regulating asset management products on 17 Nov, which are to meet the country’s top agenda of curbing systemic risk in the financial system. One of the priorities set out in the consultation paper is to eliminate the channel businesses.