Updates on the QDLP program in China

Starting from December 2020, China's foreign exchange regulator (SAFE) has taken a series of initiatives to expand the applicability of the QDLP program in the country by introducing more pilot areas in various regions (such as Hainan, Guangdong, Chongqing, and Jiangsu), and by increasing the quota granted to the existing QDLP pilot regions (such as Shanghai, Shenzhen, and Qingdao), with the bigger aim of further opening up the PRC financial markets.

Qualified Domestic Limited Partnership (QDLP) is a pilot program developed by the Chinese local governments which allows foreign and domestic asset managers to raise RMB from high net worth and institutional investors in China for the purposes of overseas investments, through a Chinese feeder product. The QDLP program is quota-based, meaning that the decision of which local governments would be launching such a program, and to what extent (ie how much RMB would the managers be allowed to bring out of China and invest overseas) would the program be launched, largely depend on the quota granted by SAFE.

The QDLP program first started in 2013 in Shanghai, immediately followed by Shenzhen in 2014. The program introduced in Shenzhen is called the Qualified Domestic Investment Entity (QDIE) program, which is very similar in nature to the QDLP programs in other cities, except that the QDIE program was mostly used for investments in overseas private equities. In contrast, the QDLP program could be used for investments in publicly traded stocks, bonds and financial derivatives (Securities Markets) in addition to the private equity sector. The updated QDIE policy, issued by the Shenzhen government on 30 April 2021, has explicitly expanded the investment scope to also include the Securities Markets, a significant move that renders the QDIE program to be further in line with the QDLP programs.

Meanwhile, Beijing launched the QDLP program in the spring of 2020, and Hainan, last month. This wave of quota top-up and expansion of pilot cities has been very welcomed in the market. We hereby summarise below some eye-catching points for the most recent regulatory updates. You may refer to our previous articles (here and here) on how a QDLP product and other cross-border programs for foreign asset managers can be launched.

• Requirements on the application: Shenzhen's new rule has removed the thresholds in relation to aspects such as the minimum registered capital and paid-in capital of the managers, the experience and qualifications of the controlling shareholders and the senior management team, and the minimum product scale, whilst these requirements are still commonly seen in other cities' written policies. For instance, for the registered capital of a QDLP manager, Shanghai requires such to be at least USD 2 million, whereas Beijing requires a minimum of RMB 30 million, and Hainan a minimum of RMB 5 million, for such. In addition, Beijing and Hainan respectively require at least one investment personnel with over five years of relevant experience and two investment personnel with over three years of experience. Even though we understand these factors would still very likely be considered when the Shenzhen government reviews the applications, the removal of these hard requirements from the rule is still significant as it indicates the Shenzhen government's flexibility in this regard.

• Synergising QDLP with PFM: Many cities (including Shanghai, Beijing and Hainan) are currently on an active attempt to synergise and align QDLP with private fund management (PFM) managers to the fullest possible extent, in other words, to encourage the establishment of one entity to concurrently carry out fund management activities under both the QDLP and PFM regimes. Under the PFM regime, a foreign asset manager is allowed to establish a WFOE or a joint venture which serves as an entity of the private fund manager. The manager can then raise funds from PRC qualified investors to invest in stocks, bonds, fund units and other securities and derivatives in the PRC market. More information on the PFM regime can be found here.

  According to public information, more than 30 foreign asset managers have established a PFM manager since the introduction of the PFM regime in 2016. Among the ones that have set up both the PFM entity and QDLP entity, most of them adopt the parent-subsidiary structure. We noted that recently a few PFMs have expanded their business scope by adding the element of "managing overseas investment funds" (ie QDLP funds) into the business scope of their PFM entities. That said, these PFMs have neither been successfully launched nor filed any QDLP fund products. We understand that the key reason behind this is that, as the PFM regime is based on the FAQ 10 issued by the AMAC (the de facto regulator for fund management in China) and endorsed by the central government, which provides that PFM managers shall conduct fund management businesses from within the PRC, it follows that allowing a PFM manager to conduct QDLP fund management businesses would require a breakthrough of such rule, and would therefore require internal approvals from the CSRC, the highest regulator of the fund industry at the central government level. Currently, the CSRC has been reviewing the possibility of merging the PFM and QDLP regimes into one.

• Securities and Futures Business Operators utilising the QDLP program: Shenzhen allows not only the fund managers that have been registered as a Private Investment Fund Manager with the AMAC, but also qualified securities firms, futures firms and retail fund managers and their subsidiaries (collectively the "Securities and Futures Business Operators") to utilise the QDLP quota. Under the PRC law, Securities and Futures Business Operators may launch privately issued investment plans (usually in the form of contractual arrangements) for investments in equities, debts and derivatives.

  Since the foreign shareholding restrictions have been lifted in April 2020, a number of foreign securities firms (eg UBS, Goldman Sachs, JP Morgan, DBS, Nomura) and fund managers (eg Blackrock, Neuberger Berman, Fidelity) have been speeding up their market expansion in China, by acquiring controlling shareholding interests in a joint venture company or setting up a wholly owned one that conducts securities or fund management business. The Shenzhen QDLP program offers these foreign owned Securities and Futures Business Operators the opportunity to use the RMB they raise in China to feed into their overseas products.

• Quota: In Beijing and Shenzhen, the QDLP manager shall submit an application for each of the QDLP product that it intends to launch. Meanwhile in Shanghai and Hainan, the quota is granted at the manager (rather than the product) level, ie the manager will get a quota for all of its QDLP products in one application and the manager itself will allocate the quota among the products as it sees fit. In the meantime, all these regions have set a time limit for the usage of the quota. For example, Beijing requires that the quota shall be used within 2 years after it is being granted, otherwise any remaining amount may be recalled, whereas Shenzhen and Hainan have both set up a 1-year limit, with Shanghai setting up a 6-month limit. 

In light of the rapid development of the QDLP programs throughout China and the varied requirements in different cities, we suggest asset managers seek specific legal and tax advice before deciding which QDLP program to use. If you have any questions, please do not hesitate to contact us.