The Chinese authorities have recently issued a series of relaxation legislation and policies to further encourage the development of the Chinese asset management sector. Amongst others, we highlight in this article the new opinions on the Greater Bay Area (GBA) which has become a very hot topic recently, a proposed regulatory regime for the securities and fund investment advisory business in China, and the recent regulatory developments on the QFII/RQFII regime.
New asset management initiatives in the GBA
On April 24, 2020, Chinese primary financial regulators (including the People’s Bank of China (PBOC), the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission (CSRC) and the State Administration of Foreign Exchange (SAFE)) jointly issued the Opinions on Providing Financial Support for the Development of the GBA including Guangdong, Hong Kong and Macau (in Chinese: 《关于金融支持粤港澳大湾区建设的意见》, the GBA Opinions).
The GBA Opinions specifically discuss the following points relating to the asset management sector:
- Exploring and setting up the mechanism of cross border wealth management connects: supporting the PRC citizens inside the GBA to purchase the wealth management products distributed by Hong Kong or Macau banks, supporting Hong Kong or Macau citizens to purchase the wealth managements products distributed by the PRC banks inside the GBA.
- Exploring the pilot regime of private equity (PE) funds’ cross-border investment, including: (i) permitting institutional investors in Hong Kong or Macau to invest into mainland China’s PE / venture capital (VC) funds through the Qualified Foreign Limited Partnership (QFLP) regime; and (ii) gradually promoting the PE funds in mainland China to make outbound investment under the Qualified Domestic Limited Partnership (QDLP) and Qualified Domestic Investment Enterprise (QDIE) regimes.
- Supporting insurers in Hong Kong and Macau to apply for the Qualified Foreign Institutional Investors (QFII) and Renminbi QFII qualifications.
- Supporting the commercial banks to set up financial asset investment companies and wealth management companies in the GBA, which are not subject to foreign shareholding restrictions.
- Supporting the setting up of foreign controlled securities companies, fund management companies and futures companies in the GBA and the expansion of the business scope of the securities joint ventures.
- Improving and perfecting the mutual access of financial markets, including Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and Bond Connect (Northbond trading link), and exploring and studying the expansion of the Bond Connect to also include the Southbond trading link.
It is anticipated that these new initiatives and further relaxation in the GMA area would create more opportunities and incentives for foreign financial investment and transactions in the asset management sector in the GBA.
Proposed regulatory regime for the securities / fund investment advisory business
On April 17, 2020, CSRC promulgated the draft Management Measures on Securities and Fund Investment Advisory Business (In Chinese: 《证券基金投资咨询业务管理办法(征求意见稿) , the Draft Investment Advisory Measures). Pursuant to the Draft Investment Advisory Measures, CSRC will introduce a new licensing regime on securities and fund investment advisory business, including consolidating current advisory licences, and imposing qualification requirements on the securities and fund investment advisory institutions (the Advisory Entities) and their shareholders.
For a long time, investment advisory business was loosely regulated in China. Although securities investment advisory business has been regulated since 1997, there is an absence of implementation and enforcement rules which distinguish securities investment advisory business from general investment advisory business and therefore market practice varies. According to the Draft Investment Advisory Measures, except for approval from or registration with CSRC, no company can use “securities investment advisory/consultancy”, “fund investment advisory/consultancy”, or similar as its company name. Also, the Draft Investment Advisory Measures for the first time introduce the following three types of licence (collectively, the Advisory Licences):
- Securities investment advisory licence (subject to CSRC approval): enabling the advisory service in respect of securities, derivatives, and other investment products recognized by CSRC.
- Fund investment advisory licence (subject to CSRC registration): enabling the advisory service in respect of securities investment funds and other investment products recognized by CSRC.
- Licence for the publication of securities research report (available to securities companies or their specialised subsidiaries at the initial stage, unless otherwise specified): enabling the forecasting of the development of the securities market or the provision of analysis on the investment value and price fluctuations of securities.
The existing legal regime governing the securities investment advisory business only imposes a very low entry threshold on Advisory Entities (i.e. the minimum paid-up capital of RMB1m). However, the Draft Investment Advisory Measures have set out higher and more stringent qualification requirements on the advisory entities and their investors, for instances:
- The net assets of the Advisory Entities shall be at least RMB100m.
- The net asset of the shareholder (holding more than 5 per cent equity) of the Advisory Entities shall be no less than RMB50m.
- The controlling shareholder (holding more than 50 per cent equity) of the Advisory Entities are subject to higher thresholds, e.g. its net asset amount being at least RMB5bn, it having been making profits in the past consecutive three years, and not been subject to material supervisory measures in the latest three years.
- The shareholder of the Advisory Entities will be strictly subject to the investment quantity limitation (1+1 rule), i.e. the maximum number of invested Advisory Entities will be two, which can only include one Advisory Entity controlled by the relevant shareholder.
- The offshore shareholder of an Advisory Entity must be a legally licensed and incorporated financial institution in a third party country or region which shall have entered into a memorandum of understanding on the securities regulatory and management cooperation with CSRC.
- The Advisory Entities will be subject to minimum personnel requirements to engage in respective business enabled by the Advisory Licences.
- Personnel of the Advisory Entities who are involved in business cycles and engaging in business such as business promotion, customer solicitation and revisit, entry into contracts, formulation and provision of investment suggestion or research report, and designing, operating, maintaining and investment suggestion-related calculation and modelling, etc. will be subject to qualification requirements and practitioner registration.
- Personnel who engage in securities investment advisory business or who engage in fund investment advisory business shall not take up dual positions and engage in business on publication of securities research report.
It is worth noting that, the Draft Investment Advisory Measures provide for a respective transition period for existing securities investment advisory entities (up to one year) and their shareholders (up to five years) to rectify if they are not in line with the requirements imposed under the Draft Investment Advisory Measures. For entities that are currently engaging in fund investment advisory business but have not yet applied for the Advisory Licences, they must apply for the Advisory Licences during a one-year transition period. For any entities who are currently publishing securities research reports, but who are not able to satisfy the requirements set out in the Draft Investment Advisory Measures, these entities will not be allowed to take on new business, while existing business can be continued but subject to termination upon expiry.
Regulatory developments on the QFII/RQFII regime
On May 7, 2020, the PBOC and the SAFE jointly promulgated the Provisions on Fund Administration of Investments into Domestic Securities and Futures by Qualified Foreign Institutional Investors (in Chinese: 《境外机构投资者境内证券期货投资资金管理规定, the QFII Fund Administration Provisions), which explicitly simplify the regulatory requirements on the use of funds by the QFIIs and Renminbi QFIIs (collectively, QFIIs).
These QFII Fund Administration Provisions echoed the announcement published by SAFE last year when SAFE decided to cancel the investment quote limitations imposed on QFIIs, subject to final approval from the State Council. As background, CSRC also issued draft regulations in January 2019, designed to merge the QFII and RQFII regimes. However, these CSRC draft regulations have not yet been formally issued. It is anticipated that the issuance of the QFII Fund Administration Provisions may be deemed as a heads-up to the market that the CSRC draft regulations will be issued fairly soon.
We set out below some key takeaways from these QFII Fund Administration Provisions:
Although custodians are obliged to make timely/regular reports to PBOC and SAFE with respect to any remittance/repatriation of funds by QFIIs, QFIIs are also required to cooperate with custodians to fulfil reporting obligations and to ensure complete and authentic information and materials to custodians.
- The investment quota approval regime has now been replaced by a registration regime with SAFE.
- The same regulatory and supervisory regime has now been launched which applies to the use of Renminbi and foreign currencies equally. The QFIIs will be permitted to freely choose the preferred currency and the timing of capital remittance into China based on their own discretion and genuine business needs.
- Procedures for QFIIs to repatriate investment returns outside of China have been simplified. For example, a specific investment return audited report issued by a PRC auditing firm and tax filing forms have been replaced by a tax clearance undertaking letter.
- The limitation on the number of custodians has been cancelled. Now the QFIIs may select multiple custodians and choose one of them as the major reporter to handle business registration matters.
- The QFII Fund Administration Provisions specifically set out a chapter to regulate the trading of derivatives by QFIIs, which has emphasized that the trading can only be conducted for hedging purposes. QFIIs shall ensure that trading is on a genuine business needs basis, i.e. their foreign exchange derivative positions shall not exceed the scale of their respective Renminbi assets corresponding to their domestic securities investment.