Mr Eric (Ye) Zou
Partner

Eric is an expert on investment funds, asset management and financial institutions, including cross-border businesses.

Eric provides legal services for mutual fund managers, hedge fund managers, and various other asset managers and financial institutions in China and represents many global asset managers and hedge fund managers in their China projects (e.g., QFII, QDII, QFLP, QDLP, WFOE PFM and MRF).

Eric usually advises regulators and self-regulatory organizations. Now Eric is member of Legal and Compliance Committee of the Insurance Asset Management Association of China, and member of Shenzhen Cross-border Private Investment Funds Committee.

Eric participated in many innovative cross-border investment projects, and has been recommended in Chambers Greater China Region Guide and The Legal 500 Asia Pacific.

Rapid Policy Development and Tremendous Opportunities for Foreign Asset Managers

1. Major Policy Reform and Trend

Competent governmental authorities in China promulgated or amended many rules on investment funds and asset management in the past few years, with an aim to (i) promote development of the industry, and (ii) curb risks exposed.

(1) Boosting Investment of Long-term Funds

In September 2024, with an aim to vigorously guide medium and long-term funds to enter the market, and strive to boost the capital market, the Office of the Central Financial Committee, and the China Securities Regulatory Commission (“CSRC”) jointly issued the Guiding Opinions on Promoting the Entry of Medium and Long-Term Funds into the Market.

It mainly put forward three measures: (i) to build and cultivate a capital market ecology that encourages long-term investment; (ii) to vigorously develop equity-based mutual funds and support the steady development of hedge funds; and (iii) to focus on improving the supporting policies and systems for medium and long-term funds to enter the market.

As a problem-oriented document, it put forward a number of measures to break through the difficulties and bottlenecks that affect long-term investment of medium and long-term funds, including enriching the categories of investable assets of mutual funds, establishing a fast approval channel for ETF index funds, and continuously increasing the scale and proportion of equity funds; improving the investment policy of the national social security fund and pension fund, encouraging enterprise annuity fund managers to explore differentiated investments, etc.

(2) Third Pillar Pension Fund System Rolled Out Nationwide

As an important institutional design of the third pillar of the pension system, the individual pension system was officially implemented in 2022, with 36 cities and regions taking the lead.

After two years of pilot operation, China announced that the individual pension system was promoted nationwide in December 2024. As a supporting measure to boost its development, China will optimize product supply with the inclusion of index funds in the catalog of individual pension product.

(3) Upper-level System Design Finished for Private Funds

On July 9, 2023, the State Council promulgated the Regulations on Supervision and Administration of Private Investment Funds (the “Regulations”).

Prior to its implementation, (i) although there is the Funds Law of the Peoples’ Republic of China in place, which was issued by top legislature in China, but it is only applicable to mutual funds and hedge funds without covering PE/VC funds; and (ii) the Interim Measures on Supervision and Administration of Private Investment Funds issued by CSRC in 2014 (the “Interim Measures”) is the comprehensive rule setting the foundation for private fund regulation, however, the Interim Measures, as a departmental rule issued by the industry regulator, is lower in terms of legislative level, and thus cannot address many issues faced by private funds amid the rapid developments of the industry in the past decade. Therefore, the Regulations outlined the legislative system for private funds and is helpful to promote the high-quality development of the industry.

After the implementation of the Regulations, CSRC and other competent authorities will update regulatory rules on fundraising, investment operation, information disclosure and will implement differentiated supervision per business types, AUM, ongoing compliance status, risk control status and the ability to serve investors.

(4) Diversified Reform on Mutual Funds

In 2024, open-end exchange-traded funds (ETFs) ushered in great development, with the scale of stock ETFs reaching RMB 3 trillion, making it the fastest growing type among all mutual funds.

In July 2023, CSRC implemented a work plan for fee reform in the mutual fund industry, which will steadily reduce the comprehensive fees of the mutual funds in three stages: (i) the management fees and custody fees of active equity products will be reduced in an orderly manner; (ii) the transaction commission rate will be reduced, the supervision of trading behavior will be strengthened, and the disclosure of fee-related information will be strengthened; and (iii), the standardization of fund sales fees and other supporting reform measures will be introduced. Currently, the third stage reform is ongoing.

In July 2024, the National Development and Reform Commission (“NDRC”), China’s economic planner, announced that it will promote wider REITs adoption after several years’ pilot implementation. REITs in China shall adopt a “mutual fund + ABS + project company” structure, as laws in China disallow mutual funds to invest in unlisted securities directly. More REITs have been approved by NDRC and registered with CSRC in 2024, and much more are expected.

(5) More Measure to Encourage Development of PE/VC Funds

In 2024, many measures to support the development of the private equity investment have been introduced.

In June, the State Council issued the Several Policy Measures to Promote the High-Quality Development of Venture Capital; In September, the National Financial Regulatory Administration (“NFRA”) announced that the regions where the pilot equity investment schemes conducted by Financial Asset Investment Companies (known as AIC) controlled by leading domestic banks will be expanded from Shanghai to 18 cities; and NFRA is planning new measures to encourage and guide insurance funds to carry out long-term equity investment.

(6) Stringent New Rules on Hedge Funds

In 2024, the Asset Management Association of China (“AMAC”) issued the Operational Guidelines for Private Securities Investment Funds. It is a milestone new regulation for the private securities fund industry.

It covers all aspects of fundraising, investment, and operation: (i) it clarifies the initial fundraising and ongoing scale, and strengthens investor suitability requirements; (ii) it stipulates consistency in investment strategies, emphasizes portfolio investment, prohibits multi-layer nesting, and regulates bonds, over-the-counter derivatives, and programmed trading; (iii) it emphasizes fiduciary duties of trustee, prohibits disguised guarantee of principal and profit, channel business, and prohibits evading supervision through investment in over-the-counter derivatives and other asset management products; (iv) it standardizes performance display and guides attention to long-term performance; and (v) it reasonably sets a transition period for implementing the new rules.

China strengthened regulations on program trading in 2024 with new rules issued by both CSRC and Stock Exchanges.

2. Foreign Asset Managers Doing Business with or in China

China has speeded up its open to foreign financial institutions, including asset managers. For example, ever since its removal of foreign ownership limits in foreign-invested securities companies, mutual fund management companies (“FMC”), and futures companies, more than 20 new wholly foreign owned or foreign controlled firms have come into being.

On 11 January 2025, the UK Chancellor Rachel Reeves and Chinese Vice Premier He Lifeng concluded the 2025 UK-China Economic and Financial Dialogue (“EFD”). From the fact sheet of the EFD disclosed, we can see both sides reached a lot of consensuses on asset management cooperation.

We believe that there is tremendous potential for future growth of foreign asset managers doing business with China or in China.

(1) More Hedge Fund Managers Setting Up WFOE PFM

With the stringent regulatory rules on hedge funds issued by AMAC in April 2024, quite some domestic private securities investment fund managers (“PFM”) with small AUM have exited the market.

However, Aspect Capital, a leading global systematic CTA manager, announced that its wholly foreign owned enterprise (“WFOE”) in China has completed registration as a WFOE PFM with AMAC in December 2024.

Such foreign hedge fund managers as Bridgewater have built very good track record in China with their local WFOE PFM, which we believe is a strong signal to foreign hedge fund managers that China is an important playground.

(2) More Global Asset Managers Got Mutual Fund Manager License in China

In 2024, the wholly foreign owned FMC (“WFOE FMC”) set up by Allianz Global Investors officially commenced its business operation, making it the 9th WFOE FMC since China.

VanEck, an asset manager headquartered in the US is still waiting for approval by CSRC, and some other global asset managers are actively assessing application for WFOE FMC license in China.

(3) MRF Gaining Speed

In 2015, mainland China and Hong Kong jointly launched the mutual recognition of funds (“MRF”) scheme, which enables eligible Hong Kong retail funds (i.e., unit trust) to be registered and distributed in mainland China.

In 2024, the MRF scheme was greatly facilitated by two measures adopted by CSRC: (i) relaxing the cap on the value of fund units of a recognized Hong Kong fund sold to investors in mainland China from 50% to 80% of the fund’s total assets; and (ii) allowing delegation of investment management functions of a recognized Hong Kong fund to overseas asset managers within the same group.

(4) Fast Development of QDLP, with Upper-Level Rules to Come

The Qualified Domestic Limited Partner (“QDLP”) scheme enables qualified foreign asset managers to set up a foreign invested fund manager (“QDLP WFOE”) in China, and QDLP WFOE is allowed to launch RMB funds and invest in overseas markets after purchasing foreign exchanges within the quota approved.

As a local pilot scheme, QDLP developed very fast in recent years. In 2024, many QDLP WFOE of global asset managers, including but not limited to Amundi, Barings, Manulife, Neuberger Berman, Oaktree, Pictet and Value Partners launched new funds.

China will work out regulatory rules on QDLP on the State level in the future, which is to be closely followed up by global asset managers.

(5) QFLP Vigorously Encouraged

The Qualified Foreign Limited Partnership (“QFLP”) is a pilot scheme initiated by various local authorities in China serving as a channel for foreign investors to invest in China’s private equity market. Under QFLP scheme, foreign investors are allowed to participate in the establishment of a foreign-invested QFLP Manager and/or a foreign-invested QFLP Fund, which means through QFLP, foreign investors are also able to invest in RMB PE funds in China.

More and more pilot regions emerged after the State Council encouraged development of QFLP across China in a policy document in 2024. In other words, the success of QFLP as a local pilot scheme was recognized by the State. Further, China are working on national regulatory rules on QFLP, aiming to better regulate and facilitate its development.

(6) Successive Reform on QFI

Qualified Foreign Investors (“QFI”) is a scheme that allows foreign institutional investors to apply for a license, to remit inward foreign currency funds or RMB funds and to trade securities in China’s domestic securities markets after settlement of foreign exchanges or with remitted RMB directly. It is previously known as QFII and RQFII.

China has made a lot of efforts reforming QFI scheme in the past decade, with several landmark revision of regulatory rules (e.g., removing quota limit and greatly expanding investment scope in 2020).

In 2024, with updated new rules, China further simplified business registration by QFI, and optimized its account management. For examples, with the new rules, QFI only need to submit an undertaking letter on complying with tax rules in on QFI during its initial registration with foreign exchange authorities. Subsequently, when handling outbound remittance (except for liquidation) for the QFI, the QFI custodian will proceed solely based on the QFI’s written orders. That is, no need to issue a separate undertaking letter on tax payment each time when remitting profits.

With an effort to reform and open its asset management sector and to promote a competitive business environment that welcomes and is open to participation by foreign firms, China has agreed to adapt the short swing rule to allow for applications by eligible foreign mutual fund managers to calculate their number of securities held at the product level. Overseas mutual funds investing in China’s stock market through QFI scheme and Stock Connect scheme will benefit from such policy update, because before that, in principle, an asset manager must aggregate all the positions held by different products under its management to comply with disclosure of interest rules and short swing profit rule, provided that CSRC only granted an exemption to CSRC-registered domestic mutual funds.

(7) QDII Quota Granted to Foreign Invested Financial Institutions

The Qualified Domestic Institutional Investor (“QDII”) scheme was launched in 2006, allowing domestic financial institutions with QDII license and quota to invest in global financial markets.

Foreign invested financial institutions have special advantages in QDII business, and quota is always important to QDII business.

In July 2023, 19 mutual fund managers were granted QDII quotas of USD1.84 billion. Among them, the JV or WFOE FMC invested by Morgan Stanley and HSBC obtained QDII quota for the first time, each with USD120 million.

All the JV wealth management companies, controlled by BlackRock, Goldman Sachs, Schroders, JP Morgan, Amundi and BNP PARIBAS, respectively, have obtained QDII quota as well, although they were all established just several years ago.

(8) More Domestic Fund Custody License Granted to Foreign Invested Banks

In 2024, BNP PARIBAS China and HSBC China, two wholly foreign owned banks, announced that they received the domestic fund custody license from CSRC, becoming the fourth and fifth foreign invested banks holding such license following Standard Chartered Bank, Citibank, and Deutsche Bank.

As the sub-custodian in China for overseas banks, they have long played significant roles serving QFII and CIBM Direct scheme investors. With the new license, BNP PARIBAS and HSBC will be able to provide custody services to onshore funds offered by fund and asset managers domiciled in China.

Compared with domestic banks engaging in such service, it is especially reminded by CSRC that foreign banks shall consolidate their compliance management on cross-border transfer of information.

(9) ETF Link with More Countries or Regions

Two ETFs focused on Saudi Arabian stocks, namely the China Southern Asset Management CSOP Saudi Arabia ETF (QDII) listed in Shenzhen, and the Huatai-PineBridge CSOP Saudi Arabia ETF (QDII) listed in Shanghai, were established in 2024. The ETFs will indirectly invest in the Saudi market through the Hong Kong-domiciled CSOP Saudi Arabia ETF.

It a further step after various ETF Link schemes between mainland China and Hong Kong, Japan, Singapore, France, etc.

More will come. For example, China and the UK are actively assessing feasibility of China-UK ETF connect scheme to further link the capital markets of the two countries.

(10) Cross-boundary WMC Improved

To facilitate cross-boundary investment by individual residents in the Guangdong-Hong Kong-Macao Greater Bay Area, mainland China, Hong Kong and Macao jointly launched the cross-boundary wealth management connect (“Cross-boundary WMC”) scheme in 2021. Among which, the southbound scheme refers to eligible residents in the mainland GBA cities investing in wealth management products distributed by eligible financial institutions (banks and/or securities firms) in Hong Kong and Macao via designated channels.

In 2024, the regulatory rules on Cross-boundary WMC were updated, expanding the scope of eligible wealth management products, and increasing the individual investor quota.

The scope of eligible Hong Kong investment products (excluding products listed and traded on the Hong Kong Exchange) have been extended to non-complex funds domiciled in Hong Kong and authorized by the Securities and Futures Commission of Hong Kong that (i) primarily investing in Greater China equity; or (ii) assessed as low to medium-high risk (high yield bond funds and single emerging market equity funds excluded).