China opens hedge fund business to foreign invested entities

On 30 June 2016, the Asset Management Association of China (the “AMAC”) published the 10th official Q&A in relation to registration of private investment funds on its website.

The answers provided by AMAC indicate that wholly foreign owned and Sino-foreign joint venture managers of private funds (the “Private Securities Fund Managers”) incorporated in the People’s Republic of China (the “PRC”) are now permitted to register with the AMAC and operate hedge funds in the PRC (the “New Policy”). The China Securities Regulatory Commission (the “CSRC”) also voiced its support towards the new market access on the same day.

Background

The New Policy implements China’s commitments made as a result of the U.S.-China 8th Strategic and Economic Dialogue and UK-China 7th Economic and Financial Dialogue in connection with further opening up its capital market and allowing qualified foreign invested private fund managers to conduct hedge fund business in the PRC. Prior to the New Policy, mutual fund managers are subject to a 49% foreign cap in the PRC except for those set up under the Mainland and Hong Kong Closer Economic Partnership Arrangement. Such 49% foreign ownership limit is also applied in practice for private fund managers in the PRC, and so far we are not aware of a foreign invested private manager being registered with the AMAC to conduct hedge fund business. The New Policy now lifts this foreign ownership limit and will be very much welcomed by the market, although there are still limitations on the scope of eligible entities and the permissible activities of these entities.

Registration pre-requisites

The New Policy requires an applicant to satisfy the following conditions to be eligible to register with the AMAC as a Private Securities Fund Manager:

(i) it is a company incorporated in the PRC;

(ii) its foreign shareholder and (if applicable) foreign actual controller are both financial institutions approved or licensed by the financial regulator(s) in its home country/region, and the securities supervisory body in its home country/region has entered into securities supervision cooperation memorandum with the CSRC or other organisations recognised by the CSRC; and

(iii) neither it nor its foreign shareholder or (if applicable) its foreign actual controller has been subject to any material penalty by their respective supervisory or judicial authorities in the past three years.

According to Condition (ii) above, unregulated foreign fund managers are currently not able to benefit from the New Policy. It remains to be seen whether the AMAC registration would be extended to private fund managers which do not hold a finance business licence or permit as such but their activities are regulated by foreign financial regulators to certain extent.

Domestic markets only

AMAC registered foreign invested Private Securities Fund Managers may only operate domestically: they may only raise funds within the PRC, provide asset management services to domestic investors, invest in domestic markets, and, unless otherwise permitted by the CSRC, the fund manager must make investment decisions independently, and not to place orders through an offshore entity or system.

Procedure for registration and ongoing requirements

Similar to all domestic owned Private Fund Managers, a foreign invested applicant needs to complete the registration forms online and submit the relevant supporting documents to the AMAC. AMAC would confirm the registration by publishing the basic information of the application on its website within 20 working days. Post-registration, a registered fund manager is subject to the same business conduct rules and reporting obligations contained in the regulations governing all other private fund managers in the PRC

Information Sources:

CSRC Spokesperson's remarks on 30 June 2016
证监会新闻发言人张晓军答记者问

The 10th Q&A of AMAC with respect to private investment fund registration dated 30 June 私募基金登记备案相关问题解答(十)