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FINANCE

Foreign Companies Still Trying to Break Into China's Investment Funds Market

By Yue Yue and Wang Yuqian

(Beijing) — For overseas financial companies looking to break into China's vast private investment funds market, Beijing's recent vow to let them compete directly with local private funds still seems a distant promise.

JPMorgan Chase & Co., for one, is not entering the fray anytime soon.

The U.S. banking giant received Beijing's permission early this month to establish a wholly owned asset management subsidiary — the first of its kind on the mainland — in Shanghai's free trade zone.

Sources close to the government said the firm was also on track to be the first beneficiary of a groundbreaking regulatory change announced a few months ago. It would allow foreign private fund managers to sell products in China and, more importantly, buy Chinese stock for its clients.

But the plan did not pan out. JPMorgan executive Wang Qionghui said they first would focus on getting approval for cross-border business. That means opting for an existing pilot program that allows foreign institutions to raise money from Chinese investors but invest the funds abroad.

Though not giving up hope yet, Wang said, "We're paying close attention to developments on a private fund license," which is necessary for foreign companies to buy Chinese stocks for clients, she told Caixin.

She did not say what was preventing the firm from getting the license, which involves being approved by the Asset Management Association of China (AMAC) as a private fund manager that can buy stock in the A-share market. The association is a self-regulatory group that helps the China Securities Regulatory Commission (CSRC) supervise investment funds.

The AMAC has released guiding opinions in July on how foreign institutions can apply for the license. But some of the requirements have met with opposition from candidate firms, said a source close to the association who asked not be named because of the sensitivity of the matter. Conflicts include the firms' reluctance to move their entire China investment operations onto the mainland and their demand for fewer restrictions on where the parent company of a license holder must be located, according to the source.

The association is holding back on granting a license to JPMorgan because it has not decided how to resolve the conflicts, the source said.

The pilot program that Wang said the JPMorgan subsidiary is aiming for instead is known as the Qualified Domestic Limited Partner (QDLP) program. It was launched three years ago in Shanghai and has been extended to the cities of Tianjin and Qingdao. The program allows foreign hedge funds and asset management companies to set up subsidiaries in China and sell products to Chinese investors. But it requires them to invest the funds abroad, a restriction that limits the foreign competition faced by Chinese private securities funds.

People familiar with the pilot program said none of the firms was performing well. Many were struggling to sell enough products to cover their operating costs, and some have had their unused investment quota taken back by the State Administration of Foreign Exchange.

But "no one wants to give up easily on the Chinese market because it is really a big cake," said an executive from one of the companies.

Many view the yet-to-be-named new program as their opportunity to turn things around, said Zhang Jinwei, an executive of Hong Kong-based Value Partners Group Ltd., which owns a QDLP subsidiary.

The new program, unveiled by the CSRC on the last day of June, targets foreign private fund companies, as the QDLP does, but differs from it in one key aspect: it requires select institutions to invest the funds they received from Chinese investors inside China, rather than outside the country.

The new program would allow foreign private fund managers to compete directly with their Chinese peers on both product sales and portfolio management. It has been hailed as the most important progress China has made toward opening its capital market to foreign fund managers since 2002, when it allowed foreign mutual funds to enter the country.

Foreign portfolio managers have always looked forward to "entering the A-share market and to sharing in the dividends of China's economic growth," Josh Gu, director of quantitative research at Hedge Fund Research, which provides data and analysis of hedge funds.

Many wholly foreign owned enterprises with QDLP status in Shanghai were counting on the city government to grant them convenient access to the new program so they can invest both in and outside China at the same time, Zhang said. But the regulators "seem to have their own concerns," he added.

The fact is that the Shanghai government may never permit those QDLP institutions to participate in the new program, a source close to the city government said. "The finance office of the Shanghai government has said it wants to keep the two programs separate … even though in essence they are the same, only one for investing inside China and the other outside," he said.

"This may have to do with Shanghai government's objective of developing the city into a global financial center, which requires more emphasis on cross-border businesses," the source added rather than domestic investment. The new program, which requires fund managers to sell products and make investments inside China, does not involve currency conversions and is not considered cross-border business by the officials. So it doesn't fit with Shanghai's goals.

Other potential candidates of the new domestic investment program have qualms about the guiding opinions from the AMAC on getting a domestic investment license.

The CSRC requires, for example, that the foreign institutions locate their entire China investment team inside the country, meaning that their office, personnel and even software infrastructure must be physically based on the mainland, but this is not how many international investment companies operate, the source close to the AMAC said.

This was one of the main concerns raised to the regulators in a July meeting by representatives of foreign firms that want to participate in the new program, according to the source.

Others included opposition to the requirement that transaction orders be made by trading systems located inside China, and that the major shareholder of the fund company be registered in a country that has cooperative securities regulatory agreements with China. The second requirement excludes offshore tax heavens such as the British Virgin Islands and the Cayman Islands, where many investment firms are registered.

Regulatory restrictions are not those foreign institutions' only concern. Under the QDLP program, many have had trouble attracting Chinese investors because they're only beginning to appreciate hedge funds' balanced investment strategies, Gu said. In general, Chinese fund companies tend to give investors higher, albeit less stable, returns by tapping the volatile Chinese stock market. That makes them more appealing to many Chinese investors, he said.

"Anyone wanting to make the best of the A-share market's revelry could be disappointed" when they realize that a hedge fund is not going to give them returns that are that high, Gu said.

Despite the temporary lack of progress, "developing private fund business is definitely an important part of our business in China," Value Partners' Zhang said.

The CSRC has promised to revise the new program's rules in response to foreign fund managers' concerns at the July meeting, according to people who attended the discussion, but it's unclear how long it would take.

"There are so many details" that need to be ironed out, Zhang said. But the delay may not affect their ambition, he said, because the whole private fund industry in China is young. Considering how much it has yet to grow, both foreign and Chinese private fund companies are still near the starting line, he said.

Contact reporter Wang Yuqian (yuqianwang@caixin.com); editor Ken Howe (kennethhowe@caixin.com)

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