Shenzhen Qianhai hands out first IM-WFOE licence
Shenzhen has followed Shanghai and Tianjin in allowing overseas fund house BEA Union Investment Management to incorporate an investment management wholly foreign-owned enterprise (IM-WFOE).
The establishment means that foreign managers have another option when further applying for a private fund management (PFM) licence to sell their branded private securities investment products directly to institutional and high-net-worth clients in China.
BEA Union obtained approval from the Shenzhen municipal government to establish an IM-WFOE in the Qianhai-Hong Kong Modern Service Industry Cooperation Zone on October 30, Eleanor Wan, chief executive of the Hong Kong-based fund house, told AsianInvestor.
The creation of the IM-WFOE in Shenzhen comes two years after the first-ever such WFOE was established by Aberdeen in Shanghai in September 2015. Tianjin, a northern city close to Beijing, has also incorporated a few IM-WFOEs in the past year that aim to apply for the PFM qualifications, said Melody Yang, Beijing-based partner of law firm Simmons & Simmons.
She declined to provide the names of the companies that established the WFOEs, citing confidentiality reasons.
Choice for the smaller
At least 18 foreign firms have set up IM-WFOEs in China, but only four of them have successfully registered with the Asset Management Association of China (Amac) as PFMs. These are Fidelity, UBS Asset Management, Fullerton Fund Management, and Man Group.
BEA Union IM is a comparatively smaller asset manager, so it's likely that it will take longer for it to win a PFM licence if it were to base the WFOE in Shanghai, among the other big global asset managers. “We would be at the bottom of the list,” Wan said.
That’s the major reason why the firm turned to Shenzhen. BEA Union IM started the IM-WFOE plan with Qianhai from the beginning of the year, Wan said.
Three options
In truth, the decision to offer a PFM licence is not purely based on the size of the firm.
The three cities (Shanghai, Tianjin and Shenzhen) have different advantages and attractions, and foreign asset managers have the opportunity to choose the one that really fits into their China plans, Simmons & Simmons’ Yang said.
For Shanghai, the financial services sector has already taken up a large portion of the city’s GDP. Its financial sector has enjoyed a steady stream of preferential policies, which makes it appealing to many large global asset managers, Yang said.
Meanwhile, Shenzhen is close to Hong Kong, so it’s easier for foreign asset managers with a regional headquarters based in Hong Kong to communicate and manage an office that is based in Shenzhen. In addition, some fund managers in Hong Kong use broadly algorithmic techniques in their investment strategies, and Shenzhen's advances in high technology means that it is easier for the firms to find high-tech talents in Shenzhen as well.
Tianjin's free trade zone is also very innovative and appealing, particularly to some East Asian asset managers, because it’s geographically close to their home countries. In addition, the city is close to Beijing, so it’s convenient for its officials to communicate with the regulators in Beijing, Yang said.
"So far as we are aware, there is no IM-WFOE set up in Beijing yet", because pilot programmes usually start from free trade zones, she added.
Whether the IM-WFOE scheme can be extended to second-tier cities depends on how fast or successful the PFM regime turns out to be in the future, Yang said.
She noted that she has seen some positive developments on the scheme in China. "As we assist our clients with the PFM registration and the private fund launch, we’ve observed relevant service and market providers are getting increasingly mature and sophisticated."
Same process
One important note is that PFM is a nationwide regime, Yang said. No matter where the asset manager chooses to set up its IM-WFOE, it will need to go through the same process in terms of the PFM manager registration and fund launch.
And setting up a PFM is not easy. Yang noted that many factors needed to be taking into accounts, ranging from internal infrastructure and staff line-up, to hiring external partners including law firms, custodian banks and even auditors.
BEA Union IM has already presented itself to Amac to apply for the PFM license, Wan said. It will appoint Wei Yan, an internal staff at the Bank of East Asia, to the role of general manager of the IM WFOE. At the same time, the firm is hiring for other positions including investment and compliance functions.
“We are confident that more asset managers will come to set up IM-WFOEs in China, not only the large managers, but also mid-size and even small-sized managers,” Yang said. “I’m sure some more Hong Kong-based asset managers are also interested in Qianhai, Shenzhen,” she added.
Apart from IM WFOE, Shenzhen has been pioneering in some other schemes on foreign asset managers and foreign investments. Hong Kong’s Hang Seng Bank was the first foreign firm to win approval to set up a majority-owned Sino-foreign joint-venture fund house in Shenzhen in June 2016.
Hang Seng Bank has a 70% stake in the JV Hang Seng Qianhai Fund Management, while its mainland partner—Qianhai Financial Holdings, the financial arm of the Administrative Bureau of Qian—holds 30%.
Shenzhen also initiated and launched the qualified domestic investment enterprise (QDIE) programme in January 2015. This initiative allows Chinese fund managers to directly invest in overseas alternative assets, beyond the public equities and bonds under the qualified domestic institutional investor (QDII) scheme.