Since joining the World Trade Organisation in 2001, China has steadily promoted the process of foreign investment “coming in”.
It has done this at the national level, by establishing the qualified foreign institutional investor (QFII) programme, and rolling out in succession the Shanghai/Shenzhen-Hong Kong Stock Connect and Bond Connect mechanisms. But also at the local level, by the successive issuance of local pilot policies, such as Shanghai taking the lead in launching a qualified domestic limited partnership (QDLP) pilot scheme to attract foreign asset management institutions to set up companies that invest offshore after raising funds from qualified domestic investors.
QDLP/QDIE (qualified domestic investment entity) pilot projects have also commenced in Beijing, Shenzhen, Tianjin, Hainan and Jiangsu, for example, while various regions have also launched QFLP pilot projects, allowing foreign capital to enter the domestic equity market.
As the vanguard city in financial reform and opening up, Shanghai expressly states in the Three-Year Action Plan for Developing Shanghai into an International Financial Centre, issued in 2019, its intent to develop itself into a “global asset management centre” and continues to roll out new liberalisation and implementation initiatives.
Beijing, Shenzhen and Hainan are likewise actively implementing local support policies aimed at foreign asset management institutions, offering more options to foreign investors wishing to come to China.
Opportunities and challenges
At present, the main ways for foreign institutions to participate in the Chinese market can generally be divided into the fund model and the capital model. In the fund model, a foreign institution, after securing the relevant authorisation, invests in the Chinese securities market by QFII, Stock Connect, Bond Connect, CIBM Direct, etc. In the capital model, a foreign institution establishes an entity in China to engage in onshore asset management business.
Looking at the capital model, foreign institutions mainly stake out their claims in the domestic asset management market by establishing wholly foreign-owned entity private fund managers (WFOE PFMs), wholly foreign-owned entity public fund management companies (WFOE FMCs), joint-venture wealth management companies (JV WMCs), etc.
These are licensed financial institutions with a broader scope of business and client base, enabling foreign institutions to attain a better share in the dividends from financial industry reform and opening up, undoubtedly making them the more attractive options – and the focus of this column.
WFOE FMCs. The foreign shareholding cap in Chinese public fund management companies was officially removed on 1 April 2020. At present, BlackRock and Fidelity have China Securities Regulatory Commission approval to establish WFOE FMCs. Neuberger Berman, VanEck, AllianceBernstein and Schroders are among other foreign firms that have also applied for a licence. Foreign institutions intending to apply to establish WFOE FMCs are required to satisfy requirements including ones relating to shareholder/actual controller qualification, personnel, corporate governance, compliance management, financial standing and information technology systems.
JV WMCs. Under the Initiatives Relevant to Further Expanding the Opening of the Financial Industry to Foreign Investment issued by the Financial Stability and Development Committee in 2019, foreign asset management institutions may establish JV WMCs controlled by the foreign shareholders with subsidiaries of wholly Chinese-owned banks or insurance companies. At present, Amundi, BlackRock, Schroders and Goldman Sachs Asset Management have tied up with a number of major domestic banks to establish JV WMCs, which have been approved by the China Banking Insurance and Regulatory Commission to prepare for establishment or open for business.
JV WMCs can be seen as an extension of the traditional wealth management subsidiaries (WMSs) of commercial banks, where the relationship is with the parent, which provides resources to the WMS. A JV WMC is a complementary and mutually beneficial situation between the joint-venture parties, leveraging the foreign institution’s expertise and skills in areas such as investment research while utilising the Chinese party’s channels and local resources. As a shareholder of the JV WMC, the WMS shall establish a risk segregation mechanism so as to ensure effective differentiation of products, business premises, marketing and publicity and guard against insider trading and conflicts of interest.
In terms of business scope and product types, both the JV WMC and WFOE FMC can offer publicly offered and privately offered products, but with a distinction in the investment scope of the products. If a WFOE FMC wishes to invest in unlisted equity, debt, etc., it shall establish a subsidiary and invest by way of single asset management plans. Privately offered wealth management products of a JV WMC can be specified in the investment contract regarding the investment in listed and traded stocks, equity of unlisted enterprises and the right to benefit.
Both JV WMCs and WFOE FMCs can rely on the advanced business philosophies of the international asset management institutions and fully leverage the advantages of the domestic and foreign linkages, e.g., engaging in cross-border asset management business through QFII, QDII, etc. Furthermore, other foreign establishments in China may be fully utilised to completely integrate and optimise resources. For example, by reference to the Measures for the Administration of the Wealth Management Subsidiaries of Commercial Banks, a JV WMC can engage a qualified WFOE PFM to provide investment advisory services for its wealth management products.
JV WMCs and WFOE FMCs each have their own challenges and advantages in areas such as friction with the Chinese partners, internal conflicts of interest in product strategy design, personnel arrangements, corporate governance, information collection, cross-border data transmission, compliance with independent operation and risk segregation principles in the course of domestic and foreign linkages, etc.
China’s asset management industry has become an important force serving the real economy and the wealth management of residents and, from a global perspective, it is also the market with the greatest growth potential.
In the context of a new round of high-level liberalisation in China’s capital markets, more foreign institutions will stake out a claim in the Chinese market, bringing healthy competition and best practices to the asset management industry, offering domestic investors higher quality and more diversified choices, and promoting the high-quality development of Chinese capital markets that are “disciplined, transparent, open, dynamic and resilient”, and allow China to move from being an “asset management power” to being an “asset management giant”.