On June 30, 2016, China Securities Regulatory Commission (“CSRC”) issued a statement supporting the development to allow foreign private asset managers to apply for registration with Asset Management Association of China (“AMAC”) to provide these services through a wholly foreign owned enterprise (“WFOE”) and with no cross-border elements.
Some clarifications on this new program were provided on the same day by the 10th official Q&A regarding the registration of private investment funds, issued by AMAC.
It will allow for a foreign asset manager to create a WFOE in China to perform asset management services. As far as we can gather at this point, with the limited information available, these will be regulated as securities companies or seem to be of a similar nature. Up until this new development foreign shareholders were limited to a non-controlling share of 49% of ownership in locally regulated asset management companies (with an exception granted to Aberdeen, which was allowed previously to incorporate a WFOE within the Free Trade Zone of Shanghai, which seem to be an ad hoc approval and not a generally applicable regulation).
However these companies will not be allowed to develop its activity with cross border elements. Namely: (i) all management decisions must be done within China and may not be undertaken by its home offices (no implementing regulations were yet issued on how in practice this measure will be enforced); and (ii) assets must be raised and invested within China.
There will be a range of requirements on the shareholders of these Chinese companies, which will need to be regulated by its home regulatory commission among other requirements.
This is certainly another step of opening of the Chinese asset management market to foreign players, but it is not yet its big opening. These measures shortly followed the U.S.-China 8th Strategic and Economic Dialogue, held in June in China, and seems to be more a result of said bilateral talks than a real opening of the market.
Having no cross-border elements to the asset management services allowed to these WFOEs certainly reduces substantially the interest in this new development, but the main catch of the development is the distribution structure of Chinese financial products.
Figures of last year would put the concentration of distribution of financial products to retail clients as high as 80% by the main 5 commercial banks in China, close to 50% by ICBC and CCB alone. We have seen no substantial changes in this structure and it should remain close to the description above. Under this scenario, any new foreign asset manager would still need cooperation with local commercial banks to have its products properly distributed to retail clients. And there are already several joint-ventures between these banks and foreign banks/asset managers to perform precisely the same activity through locally incorporated Equity Joint Ventures.
After making the warnings above we are still of the opinion that this development does reveal a lot. Reveal that despite the recent woes of the Chinese market, we are still driving towards opening, albeit slower than could be anticipated last year. And for the asset managers willing to bet on the long term opening, this is certainly a relevant development, the more prepared firms in 5 years will be the ones that have been gaining knowledge of the Chinese market and have been creating its own brand with the Chinese retail investor.