China crackdown affecting WFOE applications

The recent suspension of investment company registrations in China has sparked uncertainty around foreign asset managers’ moves to set up wholly foreign-owned enterprises (WFOEs) on the mainland. 

The window for registration is not totally closed, but applications may prove more difficult than before, said Ge Yin, a Shanghai-based counsel at law firm Clifford Chance.  

This follows a warning by Shanghai-based consultancy Z-Ben Advisors that tighter restrictions to govern WFOEs are imminent, amid greater scrutiny of mainland investment firms generally. 

Early this month the Shanghai Municipal Administration for Industry and Commerce, a local branch of the State Administration for Industry and Commerce (SAIC), reportedly started to halt new registrations for licences containing terms such as “investment”, “finance”, “wealth management”, “capital”, “fund” and others related to asset management. This followed a similar move by the Beijing municipal office of SAIC in January. 

This forms part of a crackdown by mainland authorities sparked by the illegal fundraising activities of peer-to-peer lending platforms such as Beijing-based Ezubao or private equity and wealth management firms such as Shanghai-based Wealthroll Asset Management.  

WFOEs – onshore vehicles that allow foreign asset managers to conduct investment advisory business – are being affected because foreign firms will need to register their company licences with the municipal offices of AIC.

There is significant uncertainty around this issue, including over the types of WFOE that can be applied for. 

To set up an investment consulting WFOE, firms must not only deal with a branch of the AIC, but also the local branches of the Ministry of Commerce (Mofcom), which may not have the similar policies for suspending approvals, said Ge. If a foreign fund firm plans to set up a China WFOE, the first step is to seek permission from Mofcom’s local offices, then register with the local AIC. 

Meanwhile, the Beijing and Shanghai AICs are understood to be taking different approaches to WFOE applications – for instance, the Beijing AIC will not register new investment consulting WFOEs for the time being.

There is speculation that investment company registrations will be suspended until June 30, according to a Wall Street Journal report last week, citing a document saying that the approval and acceptance of such applications would be suspended until that date. 

Despite the prevailing uncertainty, Ge said live WFOE applications by foreign asset managers were still proceeding. These are temporary measures, but it is difficult to estimate how long they will last, she noted. “It will all depend on the change of circumstances."

WFOEs are 100% owned by foreign companies, allowing global fund firms to circumvent the 49% cap on ownership of domestic fund firms by overseas companies. Most WFOEs, however, can only conduct advisory business, research and client servicing, so are categorised as investment consulting or advisory WFOEs.

UK fund house Schroders recently set up WFOEs in Shanghai and Beijing, and Swiss firm Pictet Asset Management plans to establish a WFOE.

A feature discussing WFOEs in China appears in the latest (April) edition of AsianInvestor magazine.

Neither the Beijing nor Shanghai AIC branch could be reached for comment for this article.