Before China’sentry into WTO in 2001, the accumulated equities or interests owned by foreign investorsin securities investment fund management company, directly or indirectly, mustnot exceed 33%; and, it is committed by China that such ratio can be capped to49% within 3 years upon China’s entry into WTO. In December 2002, the firstSino-foreign securities investment fund management company of China, ChinaMerchants Fund Management Co., Ltd. was established, the shareholding structureof which is: 33.4% by China Merchants Bank; 33.3% by China Merchants SecuritiesCo., Ltd. and 33.3% by ING Investment Management B.V.
It has been 15years since China’s entry into WTO, is there any breakthrough on the shareholdingor interest ratio of foreign investors in securities investment fund managementcompany? And, are there any relevant restrictions on foreign-invested equityinvestment fund management company? Wetry to restore the changes and developments on market entry of foreign-investedfund management company since China’s entry into WTO hereunder. Given that domestic public fund can onlyinvest in securities while private fund mainly invests in securities and/orequity, we intends to take foreign-invested securities investment fundmanagement company and equity investment fund management company as thesubjects of research.
1. Securities Investment Fund ManagementCompany (hereinafter referred to as “Securities Fund Company”)
Either in accordance with the WTO commitment of China, or, relevant lawsand regulations including but not limited to: Securities Investment Fund Law of China (herein referred to as “Fund Law”), Catalogue of Industries for Guiding Foreign Investment and Administrative Measures on SecuritiesInvestment Fund Management Companies (hereinafter referred to as “Administrative Measures”), the shareholding ratio of foreigninvestment in Securities Fund Company is restricted to be capped at 49%. Therefore, for many years, overseas institutionsin practice have had to only hold equity interest in Securities Fund Companyinstead of realization of control, as a result of which the volume of foreigninvestment into China’s securities market has been to some extent limited.However, there happened two cases recently which seems to indicate that, theshareholding ratio of foreign investment in public and private Securities Fund Companiesis expected to be broken through.
1.1 Public Securities Fund Company
Under the tenth Supplementary Agreement of Closer Economic PartnershipArrangement (hereinafter referred to as “Agreement 10”) which was mutually promulgated by Ministry ofCommerce and Financial Commission of Hong Kong Special Autonomous Region (“HKSAR”) and formally implemented on June 01, 2016, the establishment ofSecurities Fund Company controlled by HKSAR investors is permitted. In Accordance with Schedule 1 “Detailed Commitments of Mainland to HKSAR regarding Openingup on Service and Trade” under Agreement10, fund management company invested by HKSAR financial institution canonly be joint venture and, the number of Sino-HKSAR fund companies invested byHKSAR financial institution shall be referred to the national treatment of atmost two invested fund companies in which there can only be one controlled fundcompany. Such policy swept the legalbarriers for the establishment of Securities Fund Company controlled by HKSARinvestors, and Hang Seng Qianhai Fund Management Co., Ltd (hereinafter referredto as “Hang Seng Qianhai”) has been the first Securities Fund Companycontrolled by HKSAR investors upon the implementation of Agreement 10. The establishment of Hang Seng Qianhai was approvedby China Securities Regulatory Commission (hereinafter referred to as “CSRC”)under its Reply to the Approval on theEstablishment of Hang Seng Qianhai Fund Management Co., Ltd. promulgated onJune 16, 2016. The approved registeredcapital of Hang Seng Qianhai is RMB 200 million, in which Hang Seng Bank(HKSAR) contributes RMB 140 million while Shenzhen Qianhai Financial Holdingcontributes RMB 60 million with the contribution ratio of 70% and 30%respectively. The business scopeincludes fund raising and sales, asset management for specific customers, assetmanagement and the other businesses permitted by CSRC. Hence, the first public Securities Fund Companycontrolled by foreign investors has come into being.
1.2 Private SecuritiesFund Company
In accordance with Fund Lawpromulgated in 2003, securities investment fund only includes public securitiesinvestment fund; while upon the first revision in 2012, private securities fundhas been included in the scope of regulation of Fund Law and there is a separate chapter of detailed provisionsregarding private securities fund. Meanwhile, as Fund Law is the upper law of AdministrativeMeasures, we understand that Private Securities Fund Company shall beincluded in the scope of regulation of AdministrativeMeasures which means the establishment of Sino-foreign Securities Fund Companyshall meet the restriction of foreign shareholding ratio under Administrative Measures. However, there ushered in breakthrough inShanghai Free Trade Zone last year.
As one of the contents of SeventhSino-British Economic and Finance Dialogue, China committed in the outcome of Dialogueon September 21, 2015 that those qualified wholly-owned or Sino-foreign privatefund management institutions incorporated in China can operate privatesecurities fund management business including the securities transaction in thesecondary market. In the same month, the largest public investment fund of UK,Aberdeen Asset Management Plc’s (hereinafter referred to as “Aberdeen Asset”)acquired the business license of wholly foreign-owned enterprise issued by FreeTrade Zone Branch of Shanghai Industrial and Commercial Bureau to be permittedto establish a wholly foreign-owned enterprise Aberdeen Investment Management(Shanghai) Co., Ltd (hereinafter referred to as “Aberdeen Investment”) inLujiazui Area of Shanghai Free Trade Zone. The business scope of AberdeenInvestment includes investment management, investment consultation, investmentmanagement consultation, business information consultation, enterprise managementconsultation, international economic information consultation. According to Aberdeen Asset, the business ofAberdeen Investment will focus on secondary market investment. Therefore, Aberdeen Investment has been thefirst wholly foreign-owned Private Securities Fund Company in China.
2. Equity Investment Fund ManagementCompany (hereinafter referred to as “Equity Fund Company”)
In accordance with Regulations onAdministration of Foreign-Invested Venture Capital Enterprises promulgatedby Ministry of Commerce, foreign investors are able to make equity investmentor be entrusted to manage new ventures in domestic China by establishment of Sino-foreignor wholly foreign-owned venture capital enterprise or venture capitalmanagement enterprise. Furthermore, China’s WTO commitment and relevant lawsand regulations relating to fund industry only set restriction on foreignshareholding ratio of Securities Fund Company; therefore, we understand that thereshall not be any legal barrier for the establishment of Equity Fund Companycontrolled by or wholly owned by foreign investors.
In addition, although there has not yet promulgated national laws and/orregulations relating to the establishment of foreign-invested equity investmentfund and Equity Fund Company, most of the relevant policies consecutivelypublished by Tianjin, Shanghai, Shenzhen, Xinjiang and some other localgovernments are taking an positive attitude towards the establishment offoreign-invested equity investment fund and Equity Fund Company. For example, Shenzhenhas set up working group to be responsible for the approval on theestablishment of pilot foreign-invested equity investment enterprises, toprovide one-stop services for the applicants which means by only applying once,the applicants will be able to enjoy such one-stop services including foreignexchange settlement, foreign investment approval, AIC registration, access to Qianhai,bank trusteeship, etc. And for Tianjin,Tianjin Free Trade Zone supports the normative and innovative development offoreign-invested equity investment fund, the improvement of foreign capitalsettlement and the new mode of investment fund management; it also encouragesforeign-invested equity investment and venture capital management institutionsto initiate and manage RMB equity investment funds and venture capitalfunds. As to Shanghai, it has releasedpolicies to broaden the scope of pilot Qualified Foreign Limited Partner (“QFLP”)to attract overseas angle investors, venture capitals, equity investment funds whichown rich experiences in investment of scientific and technological enterprises,to involve in the pilot; and, the sources and using channels of fund have alsobeen broaden under such policies.
It is disclosedby CSRC that there had been 101 domestic public fund companies by March of 2016,among which 45 are joint ventures and only 17 of them are with 49% foreign shareholdingratio. And, according to the statistics of Asset Management Association ofChina (hereinafter referred to as the “Association”) by June 24, 2016, among24,431 private fund management operators, there are only 228 joint ventures andwholly foreign-owned enterprises, less than 1% of the total registered operators.
However, in accordance with Tenth Questions and Answers relating toPrivate Fund Registration and Filing (hereinafter referred to as “Q&A 10”) promulgated by the Associationon June 30, 2016, those qualified wholly foreign-owned and Sino-foreignsecurities fund management institutions will be able to operate privatesecurities fund management business in domestic China upon the approval of CSRCas well as being registered as private securities fund operator with theAssociation. The release of Q&A 10has implemented China’s commitments in the outcome of Seventh Sino-BritishEconomic and Finance Dialogue and has provided detailed operating proceduresfor the engagement of private securities fund management business by whollyforeign-owned or Sino-foreign private securities fund company; therefore it canbe predicted that Aberdeen Investment and the other foreign-invested privatesecurities fund company will be registered as private securities fund operatorsin the future.
In summary, inspite of a series of encouraging policies released recently by the regulatorsof China, the proceeding on the development of market entry of foreign-investedfund management company has proved to be relatively slow on the whole sinceChina’s entry into WTO 15 years ago. Therefore,it is strongly suggested that the relevant legislations shall be strengthenedto accelerate the opening up, thus to introduce into the advanced managementexperience from abroad to better boost China’s fund industry.