To the asset management industry the following three Measures are of particular relevance:
1. Confirming to facilitate reform of QFII / RQFII rules
In February this year, CSRC issued the Measures for the Administration of Domestic Securities and Futures Investment by QFIIs and RQFIIs (Draft for Comments) and its implementing rules for public consultation (please refer to Significant Changes Proposed to QFII/RQFIIs). One of the major proposed changes is to broaden the investment scope of QFIIs / RQFIIs to cover, among other things, private securities investment funds. QFIIs / RQFIIs would also be allowed to engage in securities lending activities. By confirming this reform, the new Measure would open up new fundraising channels for asset managers, providing them greater access to foreign capital.
It is also expected that in the final version of the rules CSRC would clarify some of the proposed provisions governing QFIIs / RQFIIs, including:
- in terms of commodity futures, whether the range of commodity futures that QFIIs / RQFIIs can participate in would be aligned with the investment scope of private securities investment funds (PFM funds); and if those two ranges differ to some extent, whether a QFII / RQFII can still invest into such fund (which, presumably, can invest into a broader range of commodity futures)
- whether a QFII/RQFII could invest into PFM funds which trade financial futures not merely for hedging purpose
- whether prime brokers would be allowed to provide swaps access on futures and whether prime brokers can make use of securities and futures investments within the quota of QFIIs / RQFIIs to provide swaps access to end clients
- whether over-the-counter trades for futures and options are within the investment scope of QFIIs / RQFIIs, and
- whether a PRC affiliate would still be allowed to provide investment advisory services to its affiliated QFIIs/RQFIIs when it is not registered with AMAC as a private securities investment manager.
2. Allowing foreign shareholders to have stakes in more than one fund management companies (FMC)
On the face of it, the current regulations allow both domestic and foreign investors, either by themselves or through companies under their control, to (i) acquire a non-controlling interest in one FMC and (ii) a controlling interest in another FMC (which is commonly referred to as the 1+1 Principle).
However, in practice, no foreign player has successfully held shares in more than one FMCs except in some rare cases where the acquisition of shares in more than one FMCs was incidental to upper-level corporate restructuring. In one case, a foreign institution which had an interest in a FMC indirectly acquired an interest in another FMC, following the merger of its affiliate with another institution having a stake in the latter FMC. While the restructuring was allowed by CSRC in the first place, the foreign institution subsequently had to dispose of its shareholding in one of the FMCs.
With the introduction of this new Measure, CSRC would give foreign investors the green light to acquire stakes in more than one FMCs. This is an encouraging move which aligns with the authorities’ objective of promoting equal treatment between domestic and foreign investors.
3. Relaxing restrictions on PFM funds to trade through Stock Connect
The current PRC regulations allow funds of domestic PFMs, but not those of wholly foreign-owned enterprises which are registered as private securities investment fund managers (WFOE PFMs), to participate in Stock Connect.
This can be explained by the underlying objective of the PFM regime as set forth in the AMAC FAQ No.10 , which is to primarily encourage foreign institutions to establish PFM funds in China for boosting the domestic securities market. Therefore, the ability of trading shares listed on Hong Kong stock exchange seemed to be secondary.
It is expected that funds launched by WFOE PFMs would be allowed to invest in the Hong Kong stock market via Stock Connect following the implementation of this new measure. This would widen the investment universe available to PFM funds, enhancing the attractiveness of their fund products.
Other new Measures include setting reasonable qualification requirements for the controlling shareholder of a securities company (particularly requirement on net assets); relaxing the access restrictions on foreign banks for lending or financing and operating custodial business for securities investment funds in China; implementing comprehensive reform for full circulation of H-shares; continuing to open up futures markets and expanding the scope of permitted asset classes for trading; considering to enhance the opening up of exchange bond market to foreign players and expanding the channels for access by foreign institutional investors into exchange bond market; and considering to formulate administrative measures regarding exchange panda bonds so as to facilitate bond issuance by foreign institutions.
This CSRC announcement undoubtedly brings exciting opportunities to market players amid the recent volatility in the global market environment. The Measures reinforce the Chinese government’s determination to further reform and open up the Chinese capital market and offer national treatment to foreign investors.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
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