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China to relax onshore fund rules

Separately, a UK-China MRF programme is in the pipeline and more UK firms are expected to set up WFOEs in China.

Chinese regulators intend to allow foreign managers holding a private fund management (PFM) licence to convert their businesses into a public fund management company (FMC), which would permit them to distribute to the RMB 13.9trn ($2trn) retail investor base.

“China welcomes eligible foreign managers to convert their PFM WFOEs into an FMC, whilst allowing for continuity of [the PFM] business, ”stated a recent document issued by the UK government, which outlines policy outcomes of the UK-China Economic and Financial Dialogue.

An FMC allows asset management firms to access China’s retail market. By comparison, a PFM licence enables foreign firms to launch onshore funds only to the mainland’s qualified investor base — institutions and high net worth.

To-date, there are at least 18 foreign PFMs in the mainland that have launched 35 onshore products.

The market consensus is that a WFOE PFM may be allowed to apply for conversion to FMC in 2021, but no guidelines or detailed timelines have been provided, according to Hui Miao, Singapore-based senior analyst at Cerulli Associates.

“In general, it is a good signal. It dismisses foreign managers’ concerns over the continuity of their private fund business and dismisses uncertainty about the continued market liberalisation amid US-China trade tension,” Hui said.

China is slowly opening up its market to foreign asset managment firms. In April last year, China’s securities regulator relaxed joint venture ownership limits for foreign asset managers, which can now apply for up to 51% ownership in a Chinese FMC. The regulator also plans to remove the 51% cap by 2021, allowing foreign firms 100% ownership in domestic asset managers.

The new PFM regulation follows developments in 2016 that allowed PFMs to provide investment advisory services to security firms, fund management companies and futures companies. So far, only Neuberger Berman and Singapore-based Fullerton have obtained licences to provide these services.

“The UK welcomes China’s decision to broaden the scope of permitted PFM business, which includes providing investment suggestion services to affiliated companies or third parties,” the UK government document stated.

UK-China cross-border fund scheme

This week the London-Shanghai Stock Connect launched, with Huatai Securities as the first mainland company to list in London through the connect.

On the back of that momentum, the UK and China said they are considering the launch of a mutual recognition of funds (MRF) programme, according to the document.

“Both sides look forward to the findings of the feasibility study into the UK-China mutual recognition of funds programme,” it said, without elaborating.

More UK-based firms are also expected to set up in China.

In a separate statement, released alongside the document, the UK government noted that fund management firm Baillie Gifford, banking firm Oak North and advisory firm VCP Advisors have announced plans to set up WFOEs in China.

In addition, Schroders has also been awarded a qualified foreign limited partner (QFLP) licence and quotas, the statement noted. A QFLP licence allows foreign players to raise both onshore and offshore capital to invest in domestic private equity projects.

This is on top of Schroders’ PFM business, which has launched four onshore products in China. The firm also has a fund management venture with China’s Bank of Communications called BOCOM Schroders. Last year, it launched an Asia-themed multi-asset income fund in China via the Hong Kong-China MRF scheme.

Chinese firms and organisations are also either setting up or bolstering their businesses in the UK, according to the statement.

“[The] China Banking Association, Shanghai Stock Exchange, China Investment Corporation, the Industrial Bank and Citic Bank have announced they will be upgrading existing branches, opening representative offices or opening new branches in the UK.

“China Industrial Bank [also] announced plans for a new representative office in London,” it said.

Part of the Mark Allen Group.