Latest news on foreign invested asset fund management companies

Foreign financial services companies are expanding their wealth management operations in China to capture rising incomes. In particular, foreign asset managers have shown interest in setting up multiple operations in China in order to tap into different product opportunities in the pan-asset/wealth management arena.

Following Amudi’s establishment of the first wealth management joint venture with Bank of China in September 2020, other foreign asset managers such as Schroders PLC and Goldman Sachs Asset Management LP are awaiting final approval from the China Banking and Insurance Regulatory Commission (CBIRC) to take majority stakes in joint ventures with the wealth management subsidiaries, respectively, of Bank of Communications Ltd. and Industrial and Commercial Bank of China Ltd.

Most recently, in May 2021, CBIRC also approved BlackRock to incorporate a joint venture wealth management company with China Construction Bank and Singapore’s sovereign wealth fund, Temasek. Last August, the China Securities Regulatory Commission (CSRC) already approved BlackRock to establish the first wholly foreign owned mutual fund management company. That means that BlackRock now can operate both wealth management business and mutual fund business in China.

Although both wealth management firms and mutual fund managers are retail client facing, as they are respectively regulated by CBIRC and CSRC, the differences are also obvious, which may therefore have attracted foreign investors to consider both.

One key difference relates to investment targets. Wealth management products, as being regulated by CBRIC, are more focused on investing into less aggressive fixed-income products, while CSRC-regulated mutual funds mainly invest in stocks and bonds. Another major difference is the investors. By then, individuals (including high net worth individuals) are still the majority of the investors of wealth management products, but both institutions and individuals may become the investors of mutual funds.

In this regard, it is not uncommon in current market practice that wealth management firms and mutual fund managers (in particular those falling within the same group) co-operate closely in order to offer various types of investment portfolios to potential customers so as to expand client base.

Rules for the WM Connect in the GBA

On September 10, 2021, the People's Bank of China (PBOC) Guangzhou Branch published the Detailed Rules for the Implementation of the Cross-Boundary Wealth Management Connect Pilot Scheme (the WM Connect Rules, in Chinese:《粤港澳大湾区“跨境理财通”业务试点实施细则》). Such WM Connect Rules stipulate the following key requirements regarding the implementation of the pilot wealth management connect regime (the WM Connect) in the Greater Bay Area (GBA):

• North Connect and South Connect: The “North Connect” means the business that a qualified Hong Kong/Macao investor opens a cash account with a Hong Kong/Macau bank (the HK/Macau Bank) and opens an investment account with a mainland China bank located in the GBA (the GBA Bank), whereby the funds will be remitted by the investor to the cash account first and will flow through the investment account for further purchasing investment products sold by the GBA Bank. The “South Connect” applies the same accounts opening principle (i.e. allowing mainland China investors to open cash accounts with GBA Banks and investment accounts with HK/Macau Banks) while the flow of funds is opposite.
• Qualifications for GBA Banks: The GBA Banks shall meet qualifications, the major one of which is having legal person entities or branches in the 9 cities in the GBA.
• Filing requirements of GBA Banks: In addition to satisfying the qualification requirements, GBA Banks shall also pass the testing and evaluation for conducting WM Connect business organised by the relevant counterparts of PBOC, and thereafter file the required documents with the relevant branches of the PBOC, CSRC and CBIRC. PBOC will publish a list of qualified GBA Banks which have been successfully filed on its official website from time to time.
• Investment scope: During the pilot stage, the total quota for the WM Connect has been tentatively set as RMB 150 billion. The maximum net cross-border capital inflow or outflow shall not exceed the set total quota.
• Investment quota for each investor: The investment quota for each investor under the WM Connect is currently set as RMB 1,000,000.
• Types of WM Connect investment products: According to the WM Connect Rules, the types of North Connect products include: (i) publicly-offered fixed-income and equity wealth management products (excluding the cash management-based wealth management products) rated R1 to R3 which are issued by mainland China wealth management companies; and (ii) mutual funds rated R1 to R3. Types of South Connect products will be determined by the relevant Hong Kong and Macao authorities separately and we understand that on September 10, 2021, such Hong Kong and Macao authorities published the detailed rules for the implementation of WM Connect in Hong Kong and Macao.
• Regulatory supervision: Given the pilot nature, financial regulators generally adopt a strict supervisory attitude over WM Connect activities. This includes the requirement on GBA Banks to fulfil their reporting obligations regarding their WM Connect business, including but not limited to the reporting of information (such as filing, accounts, balance, cross border payments, onshore payment and settlement, positions and business activities), and the reporting of any abnormal transactions.

Although the WM Connect remains a pilot scheme, the market has considered it as another exploration, following the Stock Connect (launched in 2014) and the Mutual Fund Connect (launched in 2015), made by the Chinese Government in order to broaden China’s cross border capital account investment channels. It is anticipated that the implementation of the WM Connect may further speed up the process of RMB internationalization.