China: major developments and updates

Introduction

In China, the legal regimes affecting the asset management sector continue to evolve in the first quarter of 2021. In this article, we set out some of the more significant developments and updates that should be on institutions’ radars.

Foreign invested wealth management companies in Shanghai

On 30 September 2020, Amundi (the largest asset manager in Europe) and BOC Wealth Management (a subsidiary of Bank of China) announced that their new wealth management joint venture (the WM Sub-JV) established in Shanghai, i.e. Amundi BOC Wealth Management Company Limited, received its license from the China Banking and Insurance Regulatory Commission (CBIRC) and was ready to open. It’s the first foreign majority-owned WM Sub-JV allowed to design and offer wealth management products in the Chinese market.

Thereafter, other financial giants, including BlackRock and Schroders, have also received approval by CBIRC to incorporate their respective WM Sub-JVs in late 2020 and early 2021. In addition, BlackRock has also obtained China Securities Regulatory Commission’s (CSRC’s) approval to incorporate a mutual fund management company in China, and Schroders has submitted an application for setting up a mutual fund management company in China to CSRC.

These CBIRC approvals on new WM Sub-JVs reflected the latest legislative developments in the wealth management sector that CBIRC issued in 2018. These legislative developments established three ways in which qualified offshore financial institutions could set up wealth management entities in China:

1. setting up a standalone wealth management subsidiary with the maximum foreign shareholding up to 100% (the WM WFOE) via a licensed commercial bank which has been locally incorporated by such offshore financial institution in China earlier;
2. partnering with a local Chinese bank to incorporate a wealth management subsidiary (the WM JV) sitting under the local Chinese bank, but with the local Chinese party holding a majority stake in such WM JV only; and
3. allowing qualified offshore asset managers (on a pilot basis) to partner with (i) a licensed wealth management subsidiary incorporated by a commercial bank in China (including the above WM JV) to further incorporate a WM Sub-JV (i.e. the approach that the above market precedents are adopting), or (ii) an insurance asset manager licensed by CBIRC to further incorporate a wealth management company (though there has not been any market precedent yet), with the feasibility for the qualified offshore asset managers holding a majority stake in such WM Sub-JV or wealth management company.

In addition to the above regime governing wealth management market access, most recently on 25 December 2020, CBIRC released the Interim Measures for the Management of Distribution of WM Products by WM Subsidiary Companies of Commercial Banks (Draft for Comments) (In Chinese: 商业银行理财子公司理财产品销售管理暂行办法(征求意见稿), the Draft WM Distribution Measures) for public consultation, which aim to govern day-to-day wealth management business.

These Draft WM Distribution Measures, which will apply to WM WFOE, WM JV and WM Sub-JV equally as domestic wealth management subsidiaries, have set out the following unified market standards for the distribution of banking wealth management products:

• requirements on market access qualification, disclosure, risk management and internal control; and
• regulatory standards on distribution of wealth management products, including but not limited to sales behaviour control, requirements on promotional materials of wealth management products, classification of wealth management products and risk assessment requirements on non-institutional investors.

Plan to further relax cross-border capital investments

China Forex, an official magazine under the State Administration of Foreign Exchange (the SAFE), published an interview with YE Haisheng, the head of SAFE’s Capital Account Management Department on 19 February 2021. The interview reveals positive signals that SAFE is considering lifting various restrictions currently implemented on cross-border movement of funds with respect to capital account matters in the near future.

Most notably, according to YE, SAFE will revisit the feasibility to allow domestic individuals to make direct investment in overseas stocks and insurance products subject to an annual quota of USD 50,000 (which was first mentioned by the Chinese government in 2015 as the QDII2 regime). Under the current regime, domestic individuals are generally prohibited from making direct overseas securities investment, unless through limited channels, e.g. via QDII/QDIE/QDLP which are qualified institutional investors, the Stock Connect, and the Mutual Recognition of Fund program.

In addition, SAFE is considering implementing a pilot program enabling PE funds to make cross border investments. This is deemed as a major reform to the existing QFLP (i.e. inward PE investments) and QDLP/QDIE (outward PE investments) regimes which have not been regulated on a central basis yet, but are only implemented by local cities respectively according to various local practices.

Other major highlights in YE’s interview include:

• SAFE will assist the People’s Bank of China (PBOC) to implement the pilot wealth management connect regime (the WM Connect) in the Greater Bay Area (GBA) (see further below);
• granting investment quotas to QDII will be on a routine basis and increasing the overall quota limit will occur at a proper time;
• selecting securities companies with strong business capabilities to conduct cross-border business on a pilot basis, and studying the relevant pilot regime such as a cross-border quota limit, business categories and management of funds etc.;
• formulating unified legislation on the bond market which will be equally applicable to the inter-bank bond market and the exchange board market; and
• steadily opening-up the domestic financial derivatives market to foreign investors, and appropriately lifting the restriction (i.e. for hedging purposes only) currently imposed on offshore institutional investors’ domestic financial futures trading.

The market tends to interpret these initiatives as a significant step-forward by the Chinese government in its opening-up of a two-way capital market and push for RMB internationalism.

WM Connect in the GBA

On 5 February 2021, the Hong Kong Monetary Authority, the Securities and Futures Commission of Hong Kong, and the Monetary Authority of Macau (collectively, the HK/Macau Regulators), along with the PBOC, CBIRC, CSRC and SAFE (collectively, the Mainland China Regulators) signed the Memorandum of Understanding on the Launch of the Cross-Boundary Wealth Management Connect Pilot Scheme in the Guangdong-Hong Kong-Macao GBA (in Chinese: 关于在粤港澳大湾区开展“跨境理财通”业务试点的谅解备忘录, the MOU of Wealth Management Connect).

By signing the MOU of Wealth Management Connect, the regulators in China, Hong Kong and Macau have agreed the following major principles regarding the WM Connect:

• Investment scope: Mainland China Regulators and HK/Macau Regulators will study the investment scope for wealth management products investing into the mainland China market (the North Link WM Products) and the investment scope for wealth management products investing into Hong Kong and Macau markets (the South Link WM Products) respectively, the North Link WM Products and the South Link WM Products are collectively referred to as WM Products;
• Quota management: Regulators in the three jurisdictions will agree upon an investment quota scheme under the WM Connect, including total quota management and quota management for any single investor;
• Due diligence review on WM Products: Banks in the three jurisdictions shall be responsible for conducting due diligence over WM Products for further northward and southward investments;
• Anti-money laundering (AML) and counter terrorism financing (CTF) obligations: Banks in the three jurisdictions shall comply with their respective anti-money laundering and countering the financing of terrorism obligations with respect to the WM Connect;
• Foreign exchange control and use of fund restrictions: Funds remitted/repatriated under the WM Connect must be used for permitted investment under the WM Connect regime only, which cannot be used for other uses (such as pledges and/or encumbrances); and
• Protection on investors: Investor protection is agreed to be implemented on a local basis, i.e. local claims will be handled by local banks first according to local laws and regulations, but there will be a claim coordination and transfer mechanism which also enables cross border claims.

In fact, the WM Connect is a further implementation of the Opinions of Financial Support for the Development of the Guangdong-Hong Kong-Macao GBA (In Chinese: 关于金融支持粤港澳大湾区建设的意见) issued by the Mainland China Regulators in April 2020, which contemplated allowing mainland China citizens to purchase South Link WM Products and Hong Kong/Macau citizens to purchase North Link WM Products. The market has also commented that this WM Connect regime could be viewed as a mini QDII2 regime, a pilot program prior to the formal implementation of the QDII2 regime.