Pilot QDLP Program in Qingdao – RMB funds invest in overseas markets

The new pilot QDLP Program of Qingdao implemented on February 9, 2015 by local authorities is a significant breakthrough for the Chinese fund industry. Indeed, it enhances financial reforms in the area by promoting wealth management investments. Foreign investors can now establish an investment entity in Qingdao and set up RMB fund firms in order to invest in overseas listed securities and M&A overseas-unlisted securities and commodities markets. Fund contributions will be relaxed thereby broadening investment scope of RMB fund firms, which can now be established as partnerships. Fund Management Companies (FMC) will be established as partnerships or corporations.

Key measures:

Investment operations under the QDLP pilot measures:

FMCs:

Their main businesses are:

They must be registered in Qingdao and approved by the Qingdao Working Group. In addition, one senior management officer must be a resident representative of the FMC and attend the latter’s annual investment conference.

One of the major differences with other pilot programs in China is that there is no limitation on the amount of registered capital injection. However, this legislation is more stringent on qualifications of foreign investors, legal representatives and executive partners. 

RMB Fund Firm:

It can be established as a limited partnership with its main business being to invest in overseas self-owned capital. It must appoint a commercial bank in Qingdao as a custodian bank.

Scope of investment for RMB fund enterprises:

Investments in RMB can only be made in foreign markets and not local ones. Direct investments in overseas funds are allowed but those in China through a qualified foreign institution investor (QFII) or qualified foreign limited partnerships (QFLP) are prohibited.

Supervision:

How is it different from the Shanghai pilot measures?

Shanghai’s pilot measures were implemented in 2012. Similar requirements are imposed on credit history and performance of the FMC, the foreign investors of the RMB fund enterprise and the qualifications of the management. Pilot firms in Shanghai and Qingdao must appoint a local commercial bank as custodian bank to deal with account management.

Qingdao’s reforms are however more attractive for foreign investors, which is a breakthrough for financial reform.

Limitations on registered capital:no restrictions in Qingdao when it is limited to at least 2 million of monetary contributions in Shanghai.

Limitation on investment amount by qualified investors:not restricted in Qingdao when it is limited to at least 100 million RMB monetary contributions in Shanghai.

Criteria for foreign investors:fewer conditions to satisfy in Qingdao. In Shanghai, good performance, approval from regulators & certificate issuance by relevant authorities and complete management structure + effective internal control system must be satisfied. In Qingdao, only one of those conditions must be satisfied.

Investment scope:expanded to M&A businesses and commodities markets, when it only concerns overseas-unlisted securities in Shanghai. 

Uncertainties:

Since tax rules haven’t been released yet, uncertainties arise for investors such as carried interest allocation for compensations and dividends, foreign tax credits, permanent establishment risk and treatments variation according to local authorities’ views. Firms must therefore keep a close communication with local authorities.

Chinese investors warmly welcome these new measures since they aren’t restricted anymore for foreign exchange. Wealth management has accelerated the development of Qingdao’s financial industry. The goal is for Qingdao to become a global hub and wealth management platform for foreign investment. 

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