Regulatory update in China - Increase on foreign shareholding in fund management industry - Part I

Chinese authorities have committed that qualified foreign private asset managers would be able to engage in private fund management businesses in China via a 100% subsidiary or a joint venture established in China. They also indicate that, with respect to retail fund managers, the foreign investor would be able to exceed the current 49% limit in terms of its shareholding. The statements were made through Chinese authorities’ discussions with US Treasury secretary in June 2016. Back in September 2015, Chinese authorities conveyed a very similar message to the Chancellor of the Exchequer in UK.

These high-level discussions would be enshrined in the more detailed rules or guidance issued by the State Council, China Securities Regulatory Commission (CSRC, China’s securities regulator) and/or the Asset Management Association of China (AMAC).

On the other hand, investors from Hong Kong and Macau are already allowed to exceed the 49% limit when setting up a fund management company in China under the “Mainland and Hong Kong Closer Economic Partnership Arrangement” (CEPA). On 16 June 2016, Hang Seng Qianhai Fund Management Co, Ltd, the first joint venture fund management company controlled by an overseas investor (with a 70% shareholding) was approved to establish by China Securities Regulatory Commission (CSRC), China’s securities regulator. This company as reported is to manage retail funds in China. Its business scope consists of fund raising, fund marketing and asset management.

Foreign investment into certain industries in China is subject to a restriction on foreign shareholding. Restrictions applicable to various industries are generally set out under the “Catalogue for the Guidance of Foreign Investment Industries (Amended in 2015)” (Catalogue), unless they are modified by other more specific rules or treaties. The Catalogue provides that the foreign shareholding in a securities investment fund management company shall not exceed 49%, which is still applicable to most of the foreign-invested securities investment fund management company. Nevertheless exceptions are available now under CEPA, which allows for qualified Hong Kong financial institutions to set up securities investment fund management companies in China where the “foreign” shareholding can exceed 50%. This grants Hang Seng Qianhai Fund Management Co, Ltd the legal basis to be set up with Hang Seng Bank (ie the Hong Kong shareholder) holding 70% and Shenzhen Qianhai Financial Holdings Limited (ie the domestic shareholder) 30%.

The Mainland and Macau Closer Economic Partnership Arrangement provides similar treatment to Macau investors.

‎On the date on which this Part I is published, the AMAC issues an official notice confirming that foreign shareholding in a private asset manager (established in China) can be increased to 100% (including one managing a fund investing in China's secondary market).

Latest update with respect to the AMAC registration of the foreign invested fund managers can be viewed in Part II of this article, here.