On Jan. 5, the Asset Management Association of China (AMAC) released guidelines for foreign asset managers to launch private investment funds through Chinese subsidiaries. This comes two days after Fidelity International, through its Shanghai-based corporation, obtained a private fund management license, making it the first foreign asset manager allowed to launch products in China.
The Registration Instruction for Wholly Foreign-owned and Foreign-based Joint Venture Private Equity Investment Fund Managers (Registration Instruction) delivers on the Chinese government’s June 2016 promise to open the country’s capital markets to foreign investment firms.
The Registration Instruction details procedures and documents required for foreign asset management companies to obtain private fund management licenses in China. The rules provide needed clarity but also stipulate that foreign-invested private equity managers (FIPE managers) are subject to a number of additional requirements beyond compliance with regulations applicable to Chinese domestic fund managers. These additional requirements include:
• Investment Process
FIPE managers must ensure that their China and domestic business are separate systems, and investment decisions should be made independent of offshore systems or institutions. Further, FIPE managers must have a China-based system intact, in order to access and trace the transactional path, statistics, procedures and records. Also, persons in charge should be explicitly designated to take responsibility for investment and transactional decisions.
• Investment Practitioners
All parties including the legal representative, managing partner, general or vice managers, investment directors, compliance and risk management directors and other senior executives of FIPE managers must be fully qualified to fund practices in China. That said, compliance and risk management directors are not allowed to engage in investment activities.
• Corporate Structures
FIPE managers are required to report various information on their corporate structures, including information about their subsidiaries, branches and affiliates located in China and other overseas affiliates that might significantly impact their investment business. Additionally, the Registration Instruction requires that the person or offshore financial institution in actual control of the FIPE manager must be identified.
• Qualified Investors
FIPE managers should scrutinize investors to determine whether they are qualified. Four categories of investors have been predetermined to meet the necessary qualifications:
- Social security funds, employer annuities or pension funds, charitable funds and other social welfare funds.
- Investment plans that are legally established and recorded with the AMAC.
- Private equity managers and practitioners that invest in their own private equity funds.
- Other investors admitted by the China Securities Regulatory Commission.
A number of other foreign asset management companies have set up wholly foreign-owned enterprises (WFOEs) in China and have plans to launch their own Chinese ventures and onshore products. The Registration Instruction provides practical and actionable guidelines for asset management firms with international ambitions to make their ways into the Chinese capital market.