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FINANCE: Entry ban lifted for WFOEs and JVs Engaging in private securities investment fund management business
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Entry ban lifted for WFOEs and JVs

Engaging in private securities investment fund management business

By Kelvin Lee, PwC Tianjin

In brief

BT 201609 140 01 Finance 150703180431600On 30 June 2016, the Asset Management Association of China (AMAC) released the 10th FAQ Regarding the Registration and Record-Filing of Private Funds (FAQ No.10), confirming that foreign financial institutions are permitted to engage in private securities investment fund management business in China via setting up wholly foreign-owned enterprises (WFOEs) and joint ventures (JVs). The FAQ No. 10 also elaborates the qualification criteria for WFOEs and JVs participating in such business as well as the registration and record-filing requirements.


In this article, we will highlight the background of FAQ No. 10, summarise the criteria for qualified WFOEs and JVs, and share our observations on some practical issues. Foreign financial institutions that consider entering the Chinese private securities market as a fund manager should assess the impact of this development and make commercial adjustments to fulfil the criteria where necessary.


In detail


Background
In the past, foreign financial institutions were only allowed to engage in private securities investment fund management business through JVs, with a 49% ceiling on foreign shareholding. After several rounds of dialogues with US and UK during 2015 and 2016, China has made a commitment to fully open up this market to foreign capital.


Following that, Mr. Zhang Xiaojun, the spokesperson of China Securities Regulatory Commission (CSRC) reiterated in a recent press conference that China welcomes qualified WFOEs and JVs to commence private securities investment fund management business, including trading of securities in secondary markets.


Meanwhile, Mr. Zhang also emphasised four general principles for foreign financial institutions to comply with for the purpose of carrying out private securities investment fund management business in China, i.e. (1) the qualified WFOEs and JVs should be incorporated as companies in China; (2) the fund-raising should be conducted in a non-public method; (3) the business scope should be limited to investing in China's domestic capital market and providing asset management service to qualified domestic investors, and (4) no cross-border fund should be involved.


To implement this commitment, the CSRC has authorised the AMAC to release FAQ No. 10 for clarification to the qualification criteria and administration requirements.


BT 201609 140 03 Finance 150703180431600Qualification criteria


According to FAQ No. 10, in addition to the common requirements provided by relevant laws and regulations on general private fund managers, WFOEs and JVs applying to engage in private securities fund management business in China should register as a private securities fund manager with the AMAC by satisfying the following qualification criteria:

BT 201609 140 01 Finance hl2(1) Form of incorporation: The WFOE or JV should be incorporated as a company in China;


(2) Requirement on foreign shareholders: The foreign shareholders of the WFOE or JV are financial institutions approved or licensed by the financial regulator of the country or region of where they have the domicile; and the securities regulatory authority of that country or region shall have entered into a Memorandum of Understanding for Securities Regulatory Cooperation with CSRC or other institutions recognised by the CSRC;


(3) Having a clean record: Neither the WFOE/JV itself nor its foreign shareholders have been subject to any material punishment by any regulatory authority or judicial authority in the preceding three years;


(4) Requirement on foreign effective controllers: The foreign effective controllers (if any) of the WFOE or JV should also satisfy the aforementioned criteria (2) and (3).


Additional requirements on business operation


Besides, the WFOE or JV should also note the following requirements on its business operation:


(1) The WFOE or JV should comply with relevant foreign exchange regulations;


(2) The WFOE or JV should make independent decision for its securities and futures trading business, and should not place trading orders according to the instruction of foreign institutions or foreign systems.


BT 201609 140 01 Finance hlPwC Observation

Obviously, the opening up of China's private securities investment fund management market will attract more elite foreign fund management institutions. Thus, it helps nurture the competitiveness of market players and uphold the management capacity of China's private securities sector while more asset management experience and investment strategies are learned from foreign players. While it is a good opportunity for WFOEs and JVs to engage in private securities investment fund management in China, they should also consider the following three critical issues:


Impact on global trading models


As said, FAQ No. 10 requires WFOEs and JVs to make independent decision on placing trading orders rather than following foreign institutions or systems' instruction. We anticipate it will be a crucial issue for those foreign asset management institutions which carry out asset management business globally, and it may ultimately impact those institutions' global trading systems and models if they participate in the private securities investment fund management sector in China.


What's more, the payment of investment consulting service fee or similar kind to overseas from China may also be affected. Under such an arrangement, the regulatory authority may challenge that the trading decision is not independently made by the domestic entities if a large portion of investment consulting service fee is paid to overseas.


BT 201609 140 02 Finance 150703180431600Transfer pricing

Foreign asset management institutions which are planning to participate in China's private securities investment fund management market should also consider the transfer pricing issues when determining the service fees to be charged by offshore entities to WFOEs and JVs.


Practical issue for the company name registration


We also notice that there is a conflict on company name registration between the requirement of AMAC and the practice of Administration for Industry & Commerce (AIC) with regard to private securities investment fund management business. Practically, AIC does not allow foreign private securities fund managers to include Chinese characters such as "fund management (基金管理)", "investment management (投资管理)", "asset management (资产管理)", into their company name while AMAC does require so. In light of the new development at the policy level and the release of FAQ No. 10, some local governments, i.e. Shanghai and Tianjin, are actively studying this matter and seeking a solution to facilitate the set-up of WFOEs and JVs engaging in private securities fund management.


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