A financial support guidelines (the “Guidelines”) on the development of the Guangdong-Hong Kong-Macao Greater Bay Area (the “Greater Bay Area”) has been jointly issued by the People's Bank of China (“PBOC”), the China Banking and Insurance Regulatory Commission (“CBIRC”), the China Securities Regulatory Commission (“CSRC”) and the State Administration of Foreign Exchange (“SAFE”), according to a press release of PBOC on May 14, 2020.
The Guidelines put forward 26 specific measures in five areas: promoting the Greater Bay Area's cross-border trade and facilitating investment and financing, expanding opening-up of the financial sector, promoting the connectivity of financial markets and financial infrastructure, boosting innovation of financial services in the Greater Bay Area, and preventing cross-border financial risks.
This paper is to summarize the key points from the perspectives of investment funds and asset management.
- Exploring Establishment of a Cross-boundary Wealth Management Connect Scheme
Policy:
The scheme will enable residents of Hong Kong and mainland cities in the Greater Bay Area to invest in wealth management products in each other’s market through the banking systems.
Comment:
In 2019, wealth management connect scheme was mentioned in both the amended CEPA Service Trade Agreement and the series of measures to promote the development of the Greater Bay Area announced by the central government of China. Now, regulators in mainland China further include such scheme in their internal regulatory rules, which is a step further for the development of the wealth management connect scheme.
Wealth management connect and mutual recognition of funds between mainland China and Hong Kong (“MRF”) are two different schemes. For example, under wealth management connect scheme, wealth management products of Hong Kong managers will be sold to investors in the Greater Bay Area through Hong Kong banks; while under MRF scheme, investors in mainland China invest to public funds (unit trusts) of Hong Kong managers through the mainland China agents of such Hong Kong managers and other fund distributors in mainland China.
- Pilot Cross-boundary Investment of Private Equity Funds
Policy:
Institutional investors in Hong Kong and Macao are allowed to invest to private equity funds in mainland cities of the Greater Bay Area through QFLP scheme. The pilot schemes of QDLP and QDIE will be further promoted orderly, which enables onshore private equity funds to invest overseas. A macro prudent regulatory approach will be implemented, and both concurrent and ex-post supervision over businesses will be strengthened.
Comment:
Development of private equity funds under QFLP, QDLP and QDIE scheme in the Greater Bay Area is expected to gain speed. Regulators may focus more on concurrent and ex-post supervision, rather than ex-ante supervision.
- Improving Cross-boundary Receipt and Payment in the Insurance Sector
Policy:
Supporting insurance companies in Hong Kong and Macao to obtain RQFII and QFII license and to provide financing to the construction of the Greater Bay Area.
Comment:
Although according to the Provisions on the Administration of Funds of Qualified Foreign Institutional Investors for Domestic Securities and Futures Investment jointly issued by PBOC and SAFE on May 7, 2020, restriction on foreign exchange quota is to be scrapped and relevant administrative requirements is to be simplified since June 6, 2020, foreign institutional investors to make onshore securities investment still need to obtain QFII/RQFII license from CSRC first. Application for such license by insurance companies in Hong Kong and Macao is expected to be welcome.
- Broaden Opening-up in the Banking Sector
Policy:
Commercial banks are encouraged to set up financial asset investment companies (“AIC”) and wealth management companies in the Greater Bay Area, without limit on foreign ownership. Foreign investors are encouraged to hold shares in such financial institutions as trust companies in the Greater Bay Area.
Comment:
An AIC refers to a non-bank financial institution approved by CBIRC to mainly engage in the business of debt-to-equity swap and other supporting business. An AIC shall be initiated and established by a domestic commercial bank as the major shareholder, and an overseas institution is allowed to be a shareholder as well, with no limit on foreign ownership under any applicable rules. AIC are also permitted to launch asset management products and engage in the business of debt-to-equity swap with such raised funds.
According to currently effective policies, a commercial bank may set up a wealth management subsidiary, but the commercial bank shall be the controlling shareholder. In July 2019, China issued 11 measures on opening-up of financial industries, allowing establishment of foreign controlled wealth management companies by the aforesaid wealth management subsidiaries and global asset managers. Amundi and wealth management the subsidiary of Bank of China have been approved by CBIRC to establish such a JV in Shanghai, with Amundi as the controlling shareholder.
- Broadening Opening-up in the Securities Sector
Policy:
Supporting establishment of foreign controlled securities companies, mutual fund management companies (“FMC”) and futures companies in the Greater Bay Area. SAFE and CSRC will launch pilot cross-boundary business of such companies.
Comment:
As of April 1, 2020, foreign ownership limit on securities companies, FMC and futures companies have been removed. JP Morgan, Nomura, UBS and Goldman Sachs have controlled their JV securities companies. Neuberger Berman and BlackRock have submitted application for setting up WFOE FMC while JP Morgan is expected to purchase the rest 49% shares in its JV FMC. JP Morgan has also applied with CSRC to raise its shareholding ratio in the JV futures company from 49% to 100%.
- Formation of Funds related to the Greater Bay Area
Policy:
On the premise of not violating applicable laws and regulatory rules, supporting joint formation of funds related to the Greater Bay Area by institutions from Hong Kong, Macao and Guangdong, and supporting insurance capital and banks’ wealth management products to invest to such funds.
Comment:
Insurance capital and wealth management products are encouraged to invest to such funds, but only on the premise of not violating applicable laws. For example, retail wealth management products shall not invest to private equity funds.
- Promoting Connectivity of Financial Markets
Policy:
Improving Stock Connect and Bond Connect schemes, and studying the timing for launching Southbound Trading in Bond Connect.
Comment:
Such schemes except Southbound Trading in Bond Connect have been implemented and regulators are considering improving them. For example, according to a press release in June 2019, CSRC declared that, following in the footsteps of the inter-bank bond market, CSRC is looking into feasible and practical ways to enhance accessibility of the exchange-traded bond market to foreign institutional investors, so as to optimize investor structure and multiply sources of funding.
- Promoting Green Finance Cooperation in the Greater Bay Area
Policy:
Studying the feasibility of setting up Guangzhou futures exchange.
Comment:
As this policy is under the subject of “green finance”, it is likely that the futures to be traded on the proposed exchange may feature green finance.
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Please kindly note that this Memo is rendered mainly with respect to relevant laws and regulations of the PRC (for purposes of this Memo only, the PRC does not include Hong Kong, Taiwan or Macau) in effect as of the date of this Memo. This Memo is being furnished solely to you on a confidential basis for your reference purposes only.
Jingtian & Gongcheng Investment Funds & Asset Management Group has vast experience with asset management business in China, including cross-border asset management business (e.g., QFII, RQFII, QDII, RQDII, QDLP, QDIE, QFLP, RQFLP, Stock Connect, CIBM Direct, Bond Connect and MRF). In September 2019 and March 2020, Jingtian & Gongcheng received international recognition by garnering the China Investment Fund Law Firm of the Year Award from China Law & Practice and Asia Firm of the Year from The Asian Lawyer under leading international legal publishing group ALM, respectively.
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