Overview of recent legislative developments in the asset management sector

Introduction

The first round of liberalization policies in China’s asset management sector were announced at the Boao Forum for Asia Annual Conference in 2018. Since then, China has continued to implement legislation to liberalize foreign investment in its asset management sector. The latest round of legislative developments came into effect on October 11, 2019, which remove the foreign ownership restrictions in Chinese fund management companies and securities companies.

China does not have a consolidated legal regime regulating its asset management sector. As China’s financial system has adopted the “divided operation and management” policy (meaning that different financial services are regulated and supervised by different financial regulators), asset management business in China is regulated on a segregated basis. For example, the wealth management businesses of banks and insurance companies are regulated by the banking and insurance departments of the China Banking and Insurance Regulatory Commission (CBIRC), while the asset management business of securities firms are regulated by the China Securities Regulatory Commission (CSRC).

Foreign investors generally have two ways to enter into China’s asset management business: (i) by making a direct equity investment into asset management companies and conducting asset management business in China thereafter; and (ii) by engaging in a more limited scope of asset management business on a cross-border basis under the existing regimes, such as the Qualified Foreign Institutional Investors (QFII) for capital inflow, the qualified domestic institutional investors and other equivalent regimes for capital outflow, and various stock connects between Shanghai and Hong Kong, between Shenzhen and Hong Kong and between Shanghai and London (the Stock Connects).

Direct equity investment

The foreign ownership restrictions in Chinese fund management companies and Chinese securities companies will be fully removed and foreign investors may set up wholly foreign-owned fund management companies and securities companies from April 1, 2020 and December 1, 2020, respectively. The current maximum foreign shareholding in these companies is 51 percent, which was gradually lifted from 33 percent initially, and then 49 percent. The CSRC’s decision has been welcomed by foreign investors who are already well established in China’s market through the joint venture regime and who have a continuing interest in the Chinese asset management market.

This potential foreign shareholding liberalisation will also stimulate China’s asset management business. By way of background, in 2018, China’s primary financial regulators, including the People's Bank of China (PBOC), CBIRC, CSRC, and the State Administration of Foreign Exchange (SAFE, China’s foreign exchange regulator), for the first time jointly issued guidelines on asset management business in China (the Guidelines on AM Business), aiming to standardize asset management business in China and thereby prevent regulatory arbitrage. Following this, the financial regulators issued, or are in the process to issuing, their own regulations to implement the Guidelines on AM Business which will apply to financial institutions within their jurisdiction. With the liberalisation of the foreign ownership restrictions, it is anticipated that foreign investors will be able to substantially engage in asset management business in China via their established asset management subsidiaries in China.

Capital inflow/outflow

With respect to QFII and Stock Connects, there have been some encouraging regulatory developments:

• QFII – After the implementation of the QFII and RMB QFII for nearly 20 years, CSRC proposed in early 2019 to combine these two regimes into one single regime, called the QFII regime. Until recently, the QFII regime was subject to a quota restriction, meaning that any single QFII investor may only make an investment into the Chinese market subject to a maximum limit as approved by SAFE on a case by case basis. In September 2019, SAFE announced that it will remove the quota limit so that QFIIs may invest in China according to the real commercial needs. However, it should be noted that the existing requirements on the various investment thresholds/ratios (e.g. ratio of investment into the ‘A’ shares of a single listed company) remain unchanged.
• Stock Connects – Another noteworthy regulatory development is the launch of the stock connects between the capital markets of China and Hong Kong/London. The Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect were launched in 2014 and 2016, respectively. These enable investors in mainland China and Hong Kong to place orders, through their local securities brokers to trade eligible shares listed on the stock exchanges of the other side, followed by the Shanghai-London Stock Connect, which was launched in 2018.

Asset management focus and developments in Shanghai

In the beginning of 2020, Chinese primary financial regulators (including PBOC, CBIRC, CSRC and SAFE) and the Shanghai Municipal Government jointly issued opinions on accelerating the establishment of Shanghai as an international financial centre (the Opinions). Amongst others, the Opinions specifically discuss the following points on the asset management sector:

• Foreign institutional investors and large banks will be allowed to set up wealth management joint ventures in Shanghai on a pilot basis. Under the current legal regime, a China-incorporated commercial bank must take the controlling stake in a wealth management joint venture (being the immediate subsidiary of the commercial bank), although since July 2019, a qualified foreign asset management company has been permitted to become the controlling shareholder of a wealth management joint venture with subsidiaries of Chinese commercial banks and insurance companies.
• Foreign institutional investors will be encouraged to set up or control fund management companies and securities companies in Shanghai, according to the reform timetable as mentioned above.
• Application by offshore financial institutional investors to set up pension management companies will be approved on a case-by-case basis once the applicable requirements are met.Insurance asset management companies will be encouraged to set up specialized assets management subsidiaries in Shanghai. Insurance assets management companies may become shareholders of foreign-invested wealth management companies on a pilot basis. Permission of commodities (such as gold and oil) investments by insurance funds via the relevant commodities exchanges in Shanghai will also be explored.

What does this mean for your business?

• It is a good time for foreign investors to consider setting up wholly foreign owned local presences to conduct various types of asset management business in China (mutual funds and securities trading in particular).
• Foreign investors who have already set up an asset management business in China through the joint venture regime, may consider buying out their local partners unless they need to continue to rely on such partners for the provision of distribution channels.
• Removal of the quota restriction on QFIIs may boost the investment by foreign institutional investors in China’s ‘A’ share market.
• The success of Stock Connects with cities like Hong Kong and London provide good examples and will attract the participation of more exchanges worldwide.
• The Shanghai government welcomes pilot investments in the asset management sector, from amongst others, wealth management companies, pension management companies and insurance asset management companies.