The Unfolding of WFOE PFM Policy: Our Ongoing Observations

The year 2016 has almost slipped away and, other than the anticipated launch of the “Shenzhen-Hong Kong Stock Connect,” there seems to be no sign of releasing other policy related to the opening up of the Chinese capital markets before the end of the year. News that the plan for the Shenzhen-Hong Kong Stock Connect was approved by the State Council on August 16 is exciting, whilst the policy allowing foreign institutions to engage in private securities investment fund management business released on June 30 (“WFOE PFM Policy”) really turns out to be one of the few bright spots of the year. Since the issuance of the WFOE PFM Policy, we have been keeping close track of its progress and are eager to share our observations with you.
Regulators are well aware that effective execution is of the utmost importance in supporting an effective policy. To our knowledge, after the WFOE PFM Policy was announced, the regulators have conducted extensive market research – keeping in constant communication with the market institutions, getting to know their common concerns, and offering clarifications and explanations in due time – all of which reflects their high level of commitment to the implementation of the WFOE PFM Policy and prudent attitude. According to the China Securities Journal’s report dated September 27, 2016, the preparatory work related to the WFOE PFM registration is ready, and a few reputable foreign institutions are now actively preparing to apply for registration. Mr. Chen Ziqiang, the director of the Private Fund Department of the China Securities Regulatory Commission (“CSRC”), declared that CSRC and the Asset Management Association of China (“AMAC”) will continue to track the progress of registrations and filings, and will monitor opportunities to improve the relevant policies and mechanisms as time goes by. Everything seems to be in place and there is no turning back. Unlike the massive “grass-roots” domestic private fund managers (“PFMs”) which have grown amok, the foreign institutions may more carefully make their plans for development in China and spend more time focused on cultivating the market.
As far as the global asset managers are concerned, the process for establishing their onshore subsidiaries (“WOFEs”) and substantially developing their onshore private fund management businesses will require long-term contributions, and in most cases, the determination of how it relates to their strategies in China and even in Asia, thus requiring overall consideration at a group level. For registration policy and ongoing regulatory requirements, the global asset managers are usually concerned with three major aspects – establishment of the institution, business operations, and issuance of products. Below we have briefly outlined the key points of the regulatory requirements and the recommended guidelines.
A、Establishment of the Institution
There are three main issues involved in the establishment of the institution: (i) whether the WFOE applicant can obtain a corporate name and defined scope of business which explicitly encompass “investment management”, “asset management” and/or “fund management” as required by AMAC; (ii) whether the current QDLP pilot WFOE can be used to apply for the PFM registration; (iii) whether the direct shareholder of the WFOE applicant is required to be an overseas licensed financial institution. For the first two issues, they both involve coordination with the local government, which will depend on the result of communication with the local government on a case-by-case basis. We believe that for a global asset manager, the corporate name and scope of business of the WFOE should not be an obstacle, however, the action suspending registrations for “investment-type” enterprises nationwide, which was initiated early this year, has indeed unreasonably troubled foreign institutions. We can only hope that the local company registration authorities will step back these unreasonable temporary policy controls as soon as possible, and instead, we hope local governments can actively resolve these “technical difficulties” for foreign institutions. As for the third issue, the answer is clear – the direct shareholder of the WFOE applicant must be an overseas licensed financial institution.
B、Business Operations
With regard to the employees, office space, paid-in capital, and internal business rules, WFOE PFMs are governed by the relevant regulations and rules for PFMs, and will be treated the same as domestic-invested PFMs. However, in consideration of the features of foreign institutions, the regulators make certain requirements and also grant certain permissions for foreign institutions. On one hand, they require fund-related business practitioners of a WFOE PFM to obtain the qualifications for practicing fund-related business, in addition to requiring the WFOE PFM to have its own employees for independent investment decision-making and requiring the trading orders to be placed by its employees or onshore systems to domestic brokers. On the other hand, they also permit WFOE PFMs to take full advantage of their global investment research resources, infrastructure and risk control. We believe that for a global asset manager, its first day incorporating a subsidiary with business substance in China marks the exact beginning of “localization”, but “localization” should be a gradual process, which needs time to adapt and develop.
C、Issuance of Products
Pursuant to the current regulatory requirements, a WFOE PFM is obligated to issue its first fund product within six months upon completion of the PFM registration, otherwise it may be faced with the risk of deregistration. This is the same as the requirement for domestic-invested PFMs. Some foreign institutions may complain that such a requirement is unreasonable considering their inexperience with the Chinese market and Chinese investors. However, foreign institutions cannot be potentially given an unfair advantage over domestic institutions and therefore must accept this reality. It is recommended that a foreign institution only kick off its WFOE PFM registration application procedure on the condition that it has full confidence and well preparation it can successfully issue the first product within the six-month deadline.