Foreign funds tap new route on improved access

WFOE option increases products for domestic investors, deepens China's capital market

China's private fund management or PFM segment is seeing new entrants that are coming in through the wholly foreign-owned enterprise or WFOE route, heralding more investment avenues for domestic investors, said analysts.

There is no official data on the number of WFOEs that have registered as PFM firms in China. But knowledgeable sources said their number is estimated to be between 20 and 50, and growing.

"It is anticipated that an increasing number of qualified foreign institutions will seek to register as PFMfirms this year. We also believe that Chinese regulators will honor their commitment to welcome more foreign securities fund managers to the Chinese market," said Xie Qing and Zhang Chi in a briefing of Junhe Legal Updates earlier this year.

By the end of this year, PFM firms of the WFOE variety are expected to launch 30 investment products. More are said to be planned for the next few years.

Lawrence Au, executive advisor for Asia Pacific with BNP Paribas Securities Services, said the gradual establishment of for-eign-owned PFM firms in China would mean that investors will have more choices, and the entire capital market will get more diversified, which is a long-term positive.

In June 2016, China's securities regulator and asset management regulator had jointly announced the WFOE policy, allowing access to various Chinese markets to foreign businesses.

Since then, dozens of WFOEs have reportedly applied to establish PFM firms in China.

The WFOE option appeals to foreign companies that do not have representative offices or joint ventures yet in China. For, it gives them more power in terms of decision-making, branding, strategy execution and many other aspects.

On May 5, Fidelity International's Shanghai-based PFM firm, a WFOE, launched its first private fund in China. It is also the first global asset manager to launch a private fund in China.

Long-term commitment and potential for big demand in the China market are the major reasons for overseas PFM firms prefering the WFOE option, some industry insiders said.

"Undeniably, the renminbi bond market is key to the future of Asia's bond markets. It will play a big role in global financial markets for many years to come … The market offers tremendous opportunities to develop investment solutions for domestic investors, and play to our strength as an independent, research-focused investment house with best-in-class track record across cycles and across the globe," said Freddy Wong, fixed income portfolio manager, Fidelity International.

According to data of Wind, a financial information and technology services provider, the size of the onshore bond market is currently over 65 trillion yuan ($9.44 trillion), and is expected to reach 100 trillion yuan by 2020, surpassing the Japanese market.

Au of BNP Paribas Securities said: "WFOEs wanting to establish PFMfirms are going to be patient and they know it is a long-term effort. International players who wish to establish PFM firms (in China) hope to see more tools to hedge risks like currency volatility. Companies that have not operated in China through JVs or representative offices may need more assistance to adapt to the market and get familiar with regulations, compliance and administration procedures."