QDII, like everything in China, is evolving rapidly. In the first three years of QDII’s existence, 19 banks and three insurers were granted QDII licences. This year alone, many observers expect more than 20 licences to be granted. Already three trust firms have been granted licences in 2010. As the number of licences grows, the assets being marketed to Chinese investors under the QDII rubric are also becoming more diverse and more specialized, with a recent move toward funds that track smaller indexes from major financial centres in the west and the east.
In late April 2010, the securities commissions of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec New Brunswick and Nova Scotia signed an SCA with the CBRC in relation to QDII. Jean St-Gelais, chair of the Canadian Securities Administrators (CSA), stated, “This supervisory co-operation arrangement paves the way for Chinese commercial banks to conduct investments on behalf of their clients with Canadian-based financial institutions regulated by CSA participating jurisdictions. This could attract new capital to the Canadian market and open new markets to Canadian financial institutions.” The announcement follows similar arrangements with the Irish and Australian financial and securities regulatory authorities.
Accessing the Chinese Securities Market
Under China’s foreign exchange control and securities regulatory regime, except for foreign institutional investors—QFIIs such as foreign fund managers, insurance companies and other approved asset management institutions—foreign investors may invest only in B shares (denominated in foreign exchange and traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange). QFIIs, however, may invest in more liquid A shares and other renminbi-denominated securities.
New QFII rules in September 2009 were designed to encourage foreign investment in Chinese securities and markets by improving the process by which foreign exchange quotas are administered. The new rules permit QFII-licensed fund managers to open separate accounts for client assets. Other changes include more favourable terms for publicly offered offshore funds that invest 70% or more of their assets in China’s domestic market.
Another alternative for foreign fund managers wishing to participate in China’s domestic fund management business is the fund management joint venture (FMJV). The FMJV is the primary platform for asset management in China. There are currently about 30 FMJVs active in China. They are operated as joint ventures between a foreign fund manager carrying a minority interest and a controlling Chinese financial institution partner. Canadian participants to date include Bank of Montreal through Fullgoal Fund Management Co. Ltd. and Manulife Financial through its newly acquired joint venture, Manulife TEDA Fund Management Company Ltd.
Risks and Uncertainties
China’s diverse markets vary in their levels of economic and social development—from modern municipalities like Shanghai and Beijing, to the less developed outlying regions. Foreign asset managers and fund companies face disparate risk—legal, financial, political, social and environmental—depending on the region and industry in which they invest.
Plan sponsors need to consider regulatory risk, in particular. Although much of China’s economy has become market oriented, numerous restrictions and massive bureaucracy still create obstacles and uncertainty. The interpretation of regulation tends to vary from place to place. In some cases, several authorities or departments are responsible for implementing the same regulations.
Yet China has done much to improve the interaction between its agencies and foreign financial institutions. Accelerated by the growing importance of its financial centres and through QDII and QFII programs and FMJVs, foreign investors will have increasing access to China’s financial markets and greater certainty in their dealings with the Chinese in the years to come. BC
Scott McEvoy is a partner in the investment management practice at Borden Ladner Gervais (BLG) LLP in Vancouver. With files from Matthew Levine, an articling student with BLG.
smcevoy@blgcanada.com
> click here for a PDF version of this article