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Supplement X of CEPA permits majority ownership of a sino-foreign fund management company by a Hong Kong qualified financial institution

Supplement X to the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) took effect on 29 August 2013 to further open up the mainland financial services market to Hong Kong institutions. The CEPA is a free trade agreement between Mainland China and Hong Kong that offers Hong Kong companies preferential access to the Mainland market.

A significant development for the asset management industry under Supplement X of CEPA is the opportunity for "qualified Hong Kong-funded financial institutions" to hold majority stakes in a joint venture fund management company in the Mainland. Until now, foreign equity participation in a sino-foreign joint venture fund management company in China could not exceed 49%.

It is not entirely clear at this stage what are the specific criteria for a "Qualified Hong Kong-funded Financial Institution". Supplement X does not provide a precise definition. Based on past practice, it is expected that the relevant regulators, in this case the CSRC (China Securities Regulatory Commission), will issue specific guidelines to set out the criteria for Qualified Hong Kong-funded Financial Institutions in the next few months. In any event, the Qualified Hong Kong-funded Financial Institution is expected to fulfil the requirements of a "Hong Kong Service Provider" under CEPA.

A Hong Kong Service Provider, among other things, is required to be established in Hong Kong, having three to five years (depending on industry sector) of substantive operations in Hong Kong staffed with 50% Hong Kong residents. A Hong Kong company recently acquired by a foreign entity may not qualify unless such acquisition took place more than one year before the company applies for the Hong Kong Service Provider qualification.

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Machiuanna Chu

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