Moving on from the joint venture era: foreign fund managers can sling it alone in China with private fund licence
Aberdeen is expected to be the first foreign fund manager to receive a private fund management license. It will allow to raise funds and invest without taking up a Chinese partner.
British fund manager Aberdeen Asset Management is due to be granted a private fund manager licence in China, signifying foreign fund managers will no longer need to go into joint ventures and can operate at 100 per cent shareholding in their investment businesses.
The fund manager will receive a private fund licence for its wholly-owned foreign enterprise (WFOE) setup in Shanghai.
The quota for Britain's renminbi qualified foreign institutional investors (RQFII) programme is due to be increased as part of the 200 trade agreements that are to be concluded over President Xi Jinping’s visit to London this week, sources familiar with the situation told the South China Morning Post.
Alex Boggis, managing director at Aberdeen International Fund Managers in Hong Kong, said the licence plan is still subject to approval by the Asset Management Association of China (AMAC), the industry’s self-regulatory authority. He declined to give further details on Aberdeen’s onshore plans in China before the completion of the discussions.
“At the moment, this is just at the ministers level. But when President Xi Jinping is in London, people expect them to materialise the discussions. After the application with AMAC, [Aberdeen] will be permitted to operate a private fund business - it will be wholly owned,” said Yang Tiecheng, foreign legal consultant and leader of the Financial Regulatory group at law firm Clifford Chance.
“Previously foreign mutual funds can operate in the asset management business only via a [maximum] 49 per cent stake; now they will permit 100 per cent wholly foreign owned asset management institutions. These will be private fund licences. They can trade in secondary markets. Aberdeen will be the first to be allowed operate such a WFOE in China,” he said.
Aberdeen’s move will supersede a similar attempt to acquire a private fund licence by Hong Kong manager Value Partners whose application was submitted and whose status has been pending since 2013. Sources aware of the situation say AMAC has previously held up the application while it studied the potential impact to competition in the asset management market, which even after a summer of market turmoil, saw only mild declines in its total assets to 6.2 trillion yuan, from the peak of seven trillion yuan.
The addition of the private fund licence to the WFOE licence that Aberdeen was granted in September will allow the fund manager to engage in secondary market activities and raise funds onshore from Chinese high-net-worth and institutional investors, without taking on a Chinese partner.
Previously, there are close to 50 regulators in China with the power of granting a WFOE licence. But before Aberdeen, none of the WFOE licences granted to other foreign managers involved actual securities advisory activities or secondary market trading. Both areas at this time are restricted under regulations and require Chinese majority partnerships.
BNP Paribas set up a WFOE in Shanghai last year. It is allowed to use its office for client introduction and services only but is not allowed to engage in securities research or trading. Fidelity, under a more relaxed interpretation to its licence, has been conducting securities research and telling its offshore clients it has onshore research capability. However, all research reports its analysts submit to Hong Kong for trade execution are clearly marked “for internal use” only. Its China research staff are not allowed to engage clients onshore.
Peter Alexander, managing director of fund consultancy Z-Ben Advisors said: “The restriction will be removed sooner than later. After three years, they can apply to CSRC for a fund management [mutual fund] licence directly.”
Regulators will still have to remove a law from current legislation which restricts foreign ownership in businesses engaging in securities activities at a maximum of 49 per cent, he said.
Given the normal internal processes, Alexander believes it may be six to 12 months before most foreign managers start making meaningful reviews to their China onshore strategies. As a next step, managers will scramble to hire qualified talent to run their WFOEs.
Since the first deal inked between China Merchants and ING in 2003, most foreign managers opted for setting up a joint venture in China. Some 45 out of 100 mutual fund companies in China are now joint ventures. With rare exceptions, most of the these managers frequently suffer from disagreements over strategy and compliance and their shareholders fight for control under the same roof.