Mainland China briefing: PFM WFOEs set to enter into the public fund industry

On 17 June 2019, the Chinese and UK governments published the Policy Outcomes (Policy Outcomes) (available here) of the 10th UK-China Economic and Financial Dialogue. The Policy Outcomes provide an insight into the ways China’s financial market is further opening up to foreign asset management firms, including intended measures to allow them to operate retail fund business.

The Policy Outcomes state that “China welcomes eligible foreign managers to convert their PFM WFOEs [wholly foreign-owned entities licensed as a private fund manager] into an FMC [fund management company for public fund businesses], whilst allowing for continuity of business.” The statement marks the first time that PRC authorities have expressed such a positive attitude towards allowing PFM WFOEs to extend their businesses to distribute to public retail investors. Currently a PFM licence enables foreign firms to launch onshore funds only to the Mainland’s qualified investment base – institutions and high net worth individuals. Following the Policy Outcomes, the Asset Management Association of China (AMAC) released an announcement on 9 August 2019 (available here in Chinese), stating that AMAC will welcome PFM WFOEs to enter the China public fund industry.

To date, no further guidelines or timelines for the conversion of a PFM WFOE into an FMC has been provided by Chinese regulators. Pursuant to the 2013 Interim Provisions on Public Securities Investment Fund Management Business Operated by Asset Management Institutions (available here in Chinese) issued by the China Securities Regulatory Commission (CSRC), in addition to some general requirements, Chinese domestic PFMs carrying out retail funds activities are required to maintain a three-year clean track record, RMB 20 billion asset under management and a paid-in capital or actual paid-in contribution of no less than RMB 10 million. Whether these requirements will apply to a foreign fund manager that converts its PFM WFOEs into an FMC remains to be seen.

In the past two years, an increasing number of global asset management companies have successfully set up WFOEs in the Mainland and some of them have registered as PFMs with AMAC. For those PFM WFOEs intending to make an application to convert to FMC business, the new measures will relieve any concerns they may have over the continuity of their PFM business.

However, we understand that when foreign firms are permitted 100% ownership of FMCs as expected in 2020, or for those foreign firms that buy a majority stake in an FMC, the question of conversion may not arise as foreign managers may skip the PFM licence route and use these avenues to directly enter the Mainland retail market.