RMB funds are growing in popularity following the lifting of restrictions for foreign companies setting up in mainland China. Derek Tsoi, commercial director, Fund Services, and Shuting Li, senior manager, Fund Services, look at the trends and examine the challenges faced by clients.
China is increasingly a top global investment destination and moves by the Chinese government to relax restrictions have bolstered foreign direct investment (FDI). Renminbi (RMB) funds have been issued since 2005 and are now gaining popularity following the lifting of restrictions for foreign companies setting up funds in mainland China.
Foreign investment also got a boost in 2010 by the release of the Shanghai government’s Qualified Foreign Limited Partner (QFLP) pilot program as well as the Private Fund Management (PFM) program in 2016.
These initiatives have led to a significant increase in private fund formation and investment activity. Between 2014 and 2022, the number of private equity transactions per year in China rose from 943 to 4,858.[1]
As a result of this growth, there is a new demand for fund administration support in China.
How can foreign investment managers set up RMB funds in China?
Figures from the Asset Management Association of China show that demand for RMB funds has been growing steadily. Despite some areas of concern in parts of the Chinese economy, there is still clear interest from global investors and investment managers.
There are three routes to investment by foreign entities:
- Local RMB fund which allows onshore fundraising and investment in onshore public securities.
- The Qualified Foreign Limited Partnership (QFLP) system, which allows foreign investors to invest in Chinese entities.
The Qualified Domestic Limited Partnership (QDLP), which allows foreign fund managers to market offshore investment products to Chinese institutional investors and high-net-worth individuals (HNWIs) and the Qualified Domestic Investment Enterprise (QDIE) which allows qualified Chinese investors to invest in foreign markets.
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The QFLP and the QDLP are popular ways to utilize resources across borders, enabling capital inflow to and outflow from the Chinese markets.
What are the challenges associated with fund formation in China?
While new inflows of foreign capital are a positive move, it involves many different government and provincial regulations. That’s why fund managers may want to work with third-party service providers to ensure their entities are compliant.
Regulations and incentives are subject to rapid change and investment managers must stay up to date with the most recent policies to select the most beneficial legal structures. The initial set-up period is often essential and includes lengthy form-filling processes in Mandarin and forms that need to be filed in person. For investment managers with little or no local operational teams, this can prove complicated.
Another key consideration is the need for continuity in administrative support throughout the life cycle of the fund–from fundraising, through investment and portfolio management, to exit, which can often span 10 years.
In some cases, it can be hard to source a third-party provider with a good reputation and track record at a reasonable cost.
A partner needs to have the expertise to understand the complexities between different provinces and cities and be able to engage with multiple local providers. They need the size and experience to provide continuity and work with fund managers over a long period.
They also require understanding to keep up with new policies and incentives and help fund managers maintain clear corporate governance and an overview of their entities.
The benefits of a third-party fund service provider
In addition to ensuring that fund managers are compliant with global regulations and requirements such as anti-money laundering (AML) and Know Your Customer (KYC), a good third-party fund service provider can help navigate local regulatory obligations in China that are specific to each province. They can also provide independent financial reporting documents to ensure figures are reliable and credible.
Outsourcing fund administration support services can also free up fund managers to focus on generating returns rather than spending time and resources on running day-to-day operations.
How we can support you in China
We have a well-established footprint in China. More than 90 staff across four offices in key mainland cities–Beijing, Shanghai, Guangzhou, and Shenzhen–are ready to support global investors. The mainland teams work closely with our Hong Kong office to offer best-in-class, tailored solutions for clients.
We provide onshore end-to-end support, working with legal counsel to set up a fund and fund-related entities, and providing administrative support services to maintain daily operations throughout the fund cycle while maintaining compliance in this complex, developing market.
Why CSC
CSC provides tailored administration and strategic outsourcing solutions to support the complex operations of alternative asset managers across jurisdictions and asset types while adhering to global regulations and compliance. A market leader, we work with funds of all sizes, from start-ups to the largest and most experienced fund managers in the world. Founded in 1899, CSC prides itself on being privately held and professionally managed for more than 120 years. We are the trusted partner of choice for more than 90% of the Fortune 500® and more than 70% of the PEI 300. CSC has office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East. We are a global company capable of doing business wherever our clients are—and we accomplish that by employing experts in every business we serve. We are the business behind business®. Learn more at cscgfm.com.