China to re-launch RQDII scheme
In May 2018, the People’s Bank of China (PBOC) announced it will resume the once-suspended Renminbi Qualified Domestic Institutional Investor (RQDII) regime. The announcement came one month after China resumed the Qualified Domestic Institution Investor (QDII) scheme, which has been on hold since 2015.
The RQDII regime, first launched in 2014, permits qualified RQDIIs to invest in overseas RMB denominated products using their own RMB funds or RMB funds raised from the PRC institutional or individual investors.
Unlike the QDII regime, RQDIIs are generally not subject to approval from the State Administration of Foreign Exchange (SAFE) for obtaining any foreign exchange quota. Qualified RQDIIs may invest as much RMB funds as they are able to raise from domestic investors, provided that the amount of funds are within the maximum amount reported to or approved by the regulatory authorities.
It was believed that, in light of the pressure of capital outflow and a disguised investment into foreign currency denominated assets by RQDII, the PBOC suspended the RQDII regime in December 2015.
From past market practice, the RQDII regime largely followed the existing QDII regime in most aspects.
Unified regulatory framework for asset management industry
On 27 April 2018, the PBOC, the China Securities Regulatory Commission (CSRC), the China Bank and Insurance Regulatory Commission (CBIRC) and State Administration of Foreign Exchange (SAFE), released the Guidance Opinions Governing the Asset Management Business of Financial Institutions (the “Guidance”) (available here in Chinese). The Guidance came into immediate effect but allows a grace period until the end of 2020, by when all covered financial institutions must comply.
The Guidance is a collaboration by all the financial service regulators in China and thus it has the benefit of having all the regulators on board to promote a unified set of regulations applicable to all asset management products (AMP) offered by the banks (wealth management products), trust companies (trust products) and securities companies, fund management companies, insurance companies and future companies.
Bringing the regulatory arbitrage to an end: As of this date, AMPs offered by different financial institutions are subject to different rules and regulations issued by different regulators. The Guidance provides that AMPs shall be regulated based on the type of products, rather than the type of financial institutions offering the products, which is expected to bring the prevailing regulatory arbitrage to an end. For example, under the current regulatory regime, an AMP offered by a fund management company may be subject to much more stringent regulations in terms of both investment activities and fund raising activities, than an AMP offered by a bank, even though the strategies of these two AMPs may be substantially the same.
Channel business: Financial institutions are expressly prohibited from launching AMPs with the intention of circumventing regulatory restrictions such as prohibited asset classes or prohibited leverage ratios. Where an AMP offered by a financial institution substantially invests into an AMP offered by another financial institution (thus essentially having the same effect of delegating investment discretions), the second financial institution shall be a licensed institution with professional investment capabilities and qualifications. The Guidance allows a maximum one layer of such delegation.
Classification funds:As provided in the Guidance, public funds and open-ended private funds will not be allowed to be structured as classification funds. Further, there are hard-wired restrictions applicable to a classification fund, including: (i) the Gross Asset Value of the classification fund shall not be more than 140% of the Net Asset Value of the classification fund, (ii) the class asset ratio between the preferred class and the subordinated class shall not exceed 3:1 for a classification fund primarily investing into fixed income securities, or 1:1 for a classification fund primarily investing into equity securities, or 2:1 for a classification fund primarily investing into commodity and financial derivative products or mixed asset classes, and (iii) the classification fund shall be actively managed by the financial institution that offers the fund, and shall not be managed by investors in the subordinated class