China’s State Council recently released the Regulation on the Supervision and Administration of Private Investment Funds (the “Regulation”), which is the first high-level administrative regulation covering all types of private investment funds. The Regulation comes into effect from September 1, 2023. While marking a watershed moment in China’s domestic fund sector, below are three key implications that foreign asset managers considering China’s funds sector should note.
1) More rules may be issued in the future
The application of the Regulation with respect to foreign invested onshore managers is subject to further special rules to be issued in future. Most of the current regime, which foreign invested onshore fund managers are already subject to, will continue to apply, although it is envisioned that these may be integrated into the future rules to be issued. Nevertheless, there is uncertainty surrounding whether there will be additional requirements imposed on foreign invested fund managers under the new special rules to be issued.
2) Fundraising restrictions and exemptions
Importantly, the Regulation includes a provision that explicitly prohibits offshore institutions from raising commitments directly from PRC domestic investors unless otherwise permitted by the State. There is ambiguity on what the scope of the exceptions encompass, but it is widely presumed to include rules and regulations relating to several programs permitting foreign asset managers to raise capital from PRC domestic investors to make overseas investments, such as QDII, QDLP and QDIE. Nevertheless, international asset managers need to exercise caution when contemplating fundraising from PRC domestic investors (via cross-border business model) and be cognizant this is not misconstrued as conducting regulated activities in China. Another ambiguity is whether the prohibition on fundraising from a domestic investor would extend to such domestic investor’s overseas vehicles and entities. While a commonly held view is that “PRC domestic investors” here does not cover a PRC investor’s overseas vehicles and entities (i.e., not a “Domestic Resident” as defined under the SAFE regulations), implications of the Regulation’s promulgation could require further interpretation from the PRC regulatory authorities.
3) Potential harmonization or unification of other programs
Industry players are also watching whether differentiated requirements currently established by local governments on various programs, including on the Qualified Foreign Limited Partnership (“QFLP”) program, will become harmonized or unified. The QFLP pilot program developed by several municipal authorities is a key conduit allowing foreign investors to sponsor an onshore fund and to invest in an onshore fund for purpose of investing in onshore portfolio companies and access to China’s financial markets. Such foreign investors’ commitment in USD can be settled in RMB at the QFLP fund’s level, and the QFLP fund, through its fund-level currency conversion quota, is able to inject RMB into portfolio companies without obtaining conversion approval on a deal-by-deal basis due to China’s foreign exchange controls. Harmonization is expected to further facilitate adoption of this program among foreign asset managers.
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