The spotlight for this update is on the asset management sector
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 legislations to liberalize foreign investment in its asset management sector. The latest round of legislative developments came into effect on October 11, 2019, which would remove the foreign ownership restrictions in Chinese fund management companies and securities companies by April 1, 2020 and December 1, 2020 respectively.
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, 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: one is to make a direct equity investment into asset management companies and conduct asset management business in China thereafter, and the other is to engage in a more limited scope of asset management business via cross-border capitals inflow and outflow under the existing regimes such as the Qualified Foreign Institutional Investors (QFII), the Qualified Domestic Institutional Investors, the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect or the Shanghai-London Stock Connect.
As far as the option of foreign direct equity investment is concerned, 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 the China market through the joint venture regime and have continuing interest in the Chinese asset management market.
With regard to the option of cross-border investment into asset management business in China, there have also been some encouraging regulatory developments. 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 the State Administration of Foreign Exchange (SAFE, China’s foreign exchange regulator) 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.
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.
What does this mean for your business?
- It is becoming 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).
- For foreign investors who have already set up asset management business in China through the joint venture regime, they may consider buying out their local partners from their asset management joint ventures unless they need to continue to rely on their local joint venture partners for the provision of distribution channels.
- Due to the “divided operation and management” policy implemented in China, it is generally not possible for a foreign investor to set up one type of asset management company only and engage in various types of asset management business in China. Mutual funds, private funds, and securities remain separately regulated by CSRC.
- 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 has set up good examples and will attract the participation of more exchanges worldwide.