Foreign fund access still uncertain under new policy

By Elaine Luo, AllBright Law Offices

On 12 January 2017, China again loosened foreign investment restrictions in the financial industry by issuing the Notice on Several Measures for Expansion of China’s Opening up to the Outside World and Active Utilization of Foreign Capital.

Elaine Luo
AllBright Law Offices

The notice requires amendments to the Foreign Investment Industries Guidance Catalogue and relevant regulations to loosen the foreign investment restrictions in the areas of service industry, manufacturing industry, mining industry, etc. As to the service industry, the notice mainly focuses on loosening the foreign investment restrictions of financial institutions such as banks, securities companies, securities investment fund management companies, futures companies, insurance companies, etc. China’s media have reported this as a huge step towards opening up the financial industry, however foreign capital access to China’s financial market still has a long way to go, based on recent experience.

After recent rounds of the China-US Strategic and Economic Dialogue, and of the China-UK Economic and Financial Dialogue, there has been a significant policy consensus reached by releasing FAQ(X) Regarding Registration and Filing of Private Securities Fund, allowing foreign-funded private securities fund management institutions to access China’s securities market and conduct business including securities trading in China’s secondary market.

According to FAQ(X) released by the Asset Management Association of China (AMAC), if any wholly foreign-owned or Sino-foreign private securities fund management institutions intend to conduct business in China, they must be registered as private securities fund managers with the AMAC, and meet the following requirements:

(1) Be incorporated within China;

(2) The foreign shareholder of the institution must be approved or licensed by the financial regulatory authorities of the country or district where the foreign shareholder is located;

(3) The institution and its foreign shareholder must have received no major
penalties from either regulatory or judicial authorities.

Any offshore owner must also comply with section (2) and (3). China has set plenty of entry bars for foreign-funded private securities fund management institutions to access its securities market. There is also one major issue that has caught the author’s attention; only private securities fund management institutions with overseas financial institutions as foreign shareholder (or an ultimate offshore owner) can be registered as the private securities fund managers, while private securities fund management institutions with foreign natural persons as foreign shareholder (or ultimate offshore owner) cannot be registered.

FAQ(X) has also stated that foreign-funded private securities fund management institutions must obey certain rules apart from the current laws and regulations regarding the private securities fund: (1) The use of any RMB fund generated from the capital fund and its foreign exchange settlement must comply with China’s foreign exchange rules; and (2) Unless otherwise specified by the China Securities Regulatory Commission (CSRC), any onshore securities and futures trading must have independent decision making, rather than be ordered by an offshore institution or system.

In order to conduct private securities fund management business in China, any foreign-funded institution must meet both the requirements of registration as a foreign-funded enterprise and a foreign-funded private securities fund manager. After CSRC approval for access to China’s securities market, several foreign wholly-owned private securities fund management institutions have failed to meet the latter requirement and register as private securities fund managers with the AMAC, due to the uncertainty of implementation policies and obstacles that emerged in local practice. Aberdeen Asset Management, Bridge Water Associates and JP Morgan Asset Management have all completed their registration as a wholly foreign-owned enterprise in China, but their registrations with the AMAC are still being processed.

On 4 January 2017, FIL Investment Management (Shanghai) announced that it had successfully registered with the AMAC, which makes FIL the first wholly foreign-owned enterprise that can raise funds within China and invest in China’s securities market.

Before FIL, there were other wholly foreign-owned private securities fund managers registered at the AMAC through the Qualified Domestic Limited Partnership programme in Shanghai. But unlike FIL, these wholly foreign-owned fund managers could only raise funds in China and invest in the offshore secondary market.

The new policy reflects China’s determination to open up its financial industry to the outside world. However, the lack of corresponding implementation policies has been a real obstacle for foreign capital entering China’s financial market. Nevertheless, we have seen great developments on foreign capital access, which will require a continuing effort from the central government due to the immaturity of the new policy.

Elaine Luo is an associate at AllBright Law Offices in Shanghai

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