The CSRC laid down its blueprint for Chinese FMCs to expand their business overseas in the Regulations which provides that Hong Kong establishments can be in the form of branch company, office or subsidiary company or other forms allowed by the CSRC (Article 1).

HK establishment

To set up a Hong Kong establishment, a fund management company needs to meet the requirements on establishing branch institutions by FMCs as specified in the Measures for the Administration of Securities Investment Fund Management Companies (Order No. 22 of the CSRC). This means they must fall in line with the internal decision-making procedure for companies, have clear business objectives and planning, have proper arrangements with the administration of the Hong Kong establishment and be capable of remaining in good financial condition after making financial contributions to the Hong Kong establishment (Article 3).

Application material to be submitted to the CSRC includes:

i) an application report setting out the place of registration of the Hong Kong establishment, form of organization, business scope, amount of investment and impact on the company’s business operations;

ii) a business plan setting out the necessity and feasibility of setting up the Hong Kong establishment and an analysis on the market environment and legal environment of Hong Kong;

iii) a legal opinion issued by a PRC law firm; and

iv) other material as required by the CSRC (Article 4).

The CSRC is required to review the application and issue a decision of approval or disapproval within 60 days from the date when the application is accepted. A decision of approval made by the CSRC shall be valid for 6 months, and the FMC concerned shall set up an establishment in Hong Kong within the valid period of the decision (Article 7).

China Southern Fund Hong Kong asset management JV

Last month, the CSRC granted its approval for China Southern Fund Management (CSFM), China’s no. 2 fund house, and Oriental Patron Financial to form an asset management joint venture in Hong Kong. The JV company, CSOP Asset Management, is 70 per cent owned by CSFM and 30 per cent owned by Oriental Patron. The Hong Kong JV company will serve as a gateway for both inbound and outbound investments and the JV will be the first step in turning CSFM into a leading asset management business by introducing the fund house's investment expertise to foreign investors, while bringing new opportunities to domestic investors.

QDII

In June 2007, the CSRC issued the Trial Measures for the Administration of Overseas Securities Investment by Qualified Domestic Institutional Investors (Trial QDII Measures) and since then seven FMCs have launched their QDII fund products. CSFM’s Southern Global Enhanced Balanced Fund was the very first QDII fund launched under the Trial QDII Measures.

The QDII scheme allows domestic FMCs to launch funds to invest in overseas equities, debt securities, bonds, bank deposits and derivatives. FMCs are not, however, allowed to invest in property and precious metals, nor to underwrite securities. The Trial QDII Measures have been issued to regulate investment in overseas securities markets by qualified Chinese FMCs and securities firms - FMCs are permitted to invest in more diversified financial products under the Trial QDII Measures than their QDII bank counterparts. Previously, only domestic banks and trust companies could invest in overseas securities under the QDII scheme.

Other FMCs to follow

As China continues to encourage more and more domestic financial institutions to go global, we should expect to see other leading domestic FMCs following in the footsteps of CSFM to set up a Hong Kong establishment. Chinese FMCs see Hong Kong as a springboard for them to become a global player and that international talent will be attracted to work for them. In addition, with the Hong Kong presence, FMCs could also take over the QDII portfolio management function from their China based operation.

Yuan Tai advised China Southern Fund Management on their HK asset management JV and the launch of their first QDII fund (first ever QDII fund launch by a Chinese FMC) in 2007. Yuan Tai also advised ICBC-Credit Suisse Asset Management and Yinhua Fund Management on their first QDII fund launches in 2008.

Yuan Tai PRC Attorneys

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256 South Pudong Road

Shanghai 200120, P.R. China

Tel: (86-21) 6163-8453

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Website: www.yuantai.com.cn