China market review

In 2016, the PRC domestic funds industry saw rapid growth, largely driven by mandates from PRC banks that launched wealth management products. This trend has gradually faded out in 2017. Also in 2016, a number of fund management companies in the PRC launched retail funds which were in fact “funds of one”, tailored-made products for institutional investors, which adopted a retail funds structure rather than mandate structure to allow the investors to enjoy a PRC VAT exemption. This practice was curbed as the CSRC imposed a ban on using a retail platform for what are essentially mandate products. It remains to be seen what will be the driving force for the domestic funds business this year.

WFOE AMAC registration

On 31 March 2017, AMAC issued a circular (Chinese only) requiring that a foreign manager that intends to engage in private securities funds business and private equity funds business should set up two separate WFOEs, each obtaining AMAC registration. It is not clear to what extent these WFOEs within the same group may share personnel, systems and infrastructures, and thus costs may be high for foreign fund managers that intend to utilise the WFOE platform to carry out both business lines. By comparison, a Hong Kong asset manager that is licensed with SFC for type 9 regulated activity (asset management) is free to manage both hedge funds and private equity funds.

We met with AMAC representative in Beijing in late March and understand that AMAC welcomes foreign managers applying for AMAC registration for WFOEs. Foreign managers may consider utilising this time window to complete AMAC registration before AMAC’s policy shifts.

AMAC issues guidelines on private funds core service providers

On 1 March 2017, AMAC issued the Administrative Measures on Private Investment Fund Service Business (Chinese only). Such measures regulate both private fund managers and core service providers which offer services in relation to transfer agency, valuation, information technology, fund-raising or investment advisory activities. A private fund manager is required to (i) carry out due diligence on core service providers prior to engagement, (ii) enter into written agreements with core service providers, and (iii) evaluate core service providers on an on-going basis. A private fund manager shall be liable for any losses incurred by investors due to errors of a core service provider, although it may have a contractual claim against the relevant core service provider after making compensation to the investors. Delegation of core service functions by the core service providers (including inter-group delegation) is prohibited.

Core service providers that engage in provision of transfer agency, valuation, or information technology services are required to register with AMAC, whilst core service providers that engage in fund-raising or investment advisory activities will be subject to a separate set of AMAC rules to be released in the future.