6 July, 2019
The Chinese Vice-Premier HU Chunhua and the UK’s Chancellor of the Exchequer Philip Hammond recently attended the 10th UK-China Economic and Financial Dialogue (the “Dialogue”) in London, during which they confirmed their commitment to deepen their strategic economic collaboration and financial links. On 17th June 2019, the day the Dialogue concluded, the Chinese Ministry of Finance published the Policy Outcomes of the 10th UK-China Economic and Financial Dialogue (“Policy Outcomes”), which details the key outcomes of the Dialogue. These include the official launch of London-Shanghai Stock Connect, and information about some of the ways in which China’s financial markets are being opened up to UK institutions. In doing so, the Policy Outcomes provides insights into the future opportunities for the further opening of China’s financial markets. Below, we provide an extract of some of the key points of the Policy Outcomes:
I. QFII/RQFII License Application and Broadening of the Investment Scope
The Policy Outcomes addresses three aspects of the QFII/RQFII regime of relevance to foreign institutions, namely the investment channel, investment scope and investment quota:
(i) China welcomes British investors to invest in China’s capital market via QFII, RQFII, Stock Connect and other available channels;
(ii) China agrees to allow greater access for qualified UK financial institutions to trade in China’s commodity futures markets;
(iii) China agrees to approve and issue QFII and RQFII quotas for UK institutions.
II. Market Access for the Financial Industry
2.1 The Policy Outcomes reaffirms the relaxation of foreign ownership limits in securities companies, securities investment fund management companies (i.e., mutual fund management companies, “FMCs”), future companies and life insurance companies.
2.2 The Policy Outcomes indicates that qualified UK financial institutions will be able to register with the Asset Management Association of China (AMAC) as a wholly foreign-owned or joint venture private securities-type investment fund manager (“WFOE/JV PFM”) and that the permissible business scope will be broadened to include providing investment advisory services to affiliated companies or third parties.
We note that, currently, only PFMs that satisfied the “3+3+1” requirements are able to provide investment advisory services for privately-raised asset management products offered by securities and futures operation institutions or their subsidiaries, privately-raised wealth management products offered by bank wealth management subsidiaries, or privately-raised securities-type investment funds. Of note, the consultation paper of the QFII and RQFII regulations released earlier this year also included the proposal to allow onshore private fund managers to provide investment advisory services to their affiliated QFII/RQFIIs.
According to our observation, providing investment advisory services is an important part of the WFOE PFMs’ business; it remains to be seen how Chinese regulators will allow such PFMs to extend their investment advisory services to other foreign or domestic institutional investor clients in addition to those products or institutions specified above.
2.3 “Yi Can Yi Kong” and Converting PFMs to FMCs
At the recent “Lujiazui Forum” and in the China Security and Regulatory Commission (CSRC) follow-up media Q&A, the regulatory authorities emphasized that the “Yi Can Yi Kong” equal treatment principle should also apply equally to both domestic and foreign shareholders. A foreign investor can invest in no more than two FMCs, of which just one can be majority-owned by that foreign investor. The Policy Outcomes addresses the topics of “Yi Can Yi Kong” and “converting PFMs to FMCs” in the same section, which suggests that there is some consideration being given to foreign institutions’ preference to set up wholly or majority-owned FMCs, in addition to any existing minority-owned joint venture FMCs and/or WFOE PFMs.
In practice, any local PFM that has converted to an FMC has done so by first establishing a new entity which applies for the FMC license, and then integrating their existing private fund management business into this new entity. However, converting their business in this manner has proven to be somewhat cumbersome and the reference to a “continuity of business” mentioned in the Policy Outcomes suggests that the Chinese regulators may be considering introducing more convenience to undertake this changeover from PFM to FMC.
2.4 Fund Servicing institutions
Both China and the UK have welcome qualified UK financial institutions that comply with the relevant registration requirements to register with AMAC as fund accounting (FA) and transfer agency (TA) service providers for private funds. As yet, no foreign-owned institution has completed the TA/FA service provider registration process with AMAC. Indeed, there have been no new licenses issued to private fund servicing institutions since 2016. Our reading of the Policy Outcomes is that it means eligible foreign institutions will be able to submit an application to provide TA/FA services to private fund managers.
2.5 Fund Distribution License
The Policy Outcomes stipulates that only eligible UK financial institutions are able to apply for a license to distribute funds in China. To date, we note that only one wholly foreign-owned institution has been granted a license for independent fund distribution (iFast).
2.6 Enterprise Annuity Management License
The Policy Outcomes indicate that both China and the UK are open to the possibility of investing pension assets in offshore markets. Furthermore, we note that, while no WFOE has been granted an annuities management license at the current stage, in the Policy Outcomes it is noted that China has welcomed one foreign provider, Heng An Standard Life (HASL), to participate in the bidding process for such license.
III. UK-China Mutual Recognition of Funds
In terms of the mutual recognition of funds (MRF), we note the only MRF scheme available to date has been between mainland China and Hong Kong, and the funds have been limited to public funds. The Policy Outcomes states that both China and UK look forward to the findings of a feasibility study into a UK-China MRF program.
IV. QDLP and QDIE
The Policy Outcomes includes various comments of relevance to QDLP and QDIE:
4.1 The UK welcomes the continued issuance of QDLP and QDIE licenses to qualified UK institutions.
4.2 The UK welcomes China’s reforms to improve the management of the QDII quota and the RQDII system, and expects eligible Chinese institutions to take advantage of these schemes in order to invest in related UK financial products.
V. Opening-up of the Bond Market
Both China and the UK have agreed to continue their feasibility study into a UK-China bond market connect arrangement, including the potential extension of CFETS trading hours to resolve any difficulties that might arise due to the different time zones. In the Policy Outcomes, it is noted that the UK welcomes the need to further research the feasibility of integrating QFII/RQFII, CIBM Direct and Bond Connect.
The Policy Outcomes acknowledges the progress made by China in terms of opening up its bond market. The Policy Outcomes further mentions that China welcomes qualified British banks to develop their lead underwriting business for non-financial debt instruments in the China Interbank Bond Market, that the UK also welcomes China to consider issuing sovereign bonds and RMB PBOC bills in London, and that both sides agree to promote RMB bonds as widely acceptable collateral in UK markets.
Our Observation
Overall, the Dialogue and the Policy Outcomes indicates that the Chinese regulators are continuing to move towards an opening up of the markets, and that they are willing to take into account the specific concerns of market players in their decision-making.
For further information, please contact:
Natasha Xie, Partner, Jun He
xieq@junhe.com
1. See http://wjb.mof.gov.cn/pindaoliebiao/gongzuodongtai/201906/t20190617_3279622.html
for the complete Policy Outcomes.
2. i.e.,having 3 or more investment managers each having more than 3 years of consecutive investment experience, and having been registered with the AMAC for more than 1 year.
3. Held in Shanghai on 13th-14th June, 2019.
