Il l
B eaumont Capital Markets

China – A Market with Unprecedented Opportunities for
Foreign Asset Managers

I. Tremendous potential for future growth
As of December 2019, China1 became the world’s second largest
stock market with a combined aggregate market capitalisation ofRMB59.2 trillion, and the second largest bond market with a total
notional value of outstanding bonds standing at RMB97.0 trillion.
Since 2018, China A-shares have been included in several majorinternational indices, such as MSCI, FTSE Russell, and S&P
Dow Jones indices. With the announcement by FTSE Russell in
September 2020 to include Chinese bonds from October 2021,
Chinese bonds are set to enter the three major global bond indices,namely Bloomberg Barclays Global Aggregate Index, J.P. Morgan
Government Bond Index-Emerging Markets, and FTSE World
Government Bond Index.
Index inclusion has in recent years brought billions of dollars ofinflows into China and greater allocation of RMB-denominatedassets by foreign investors. Despite this, however, foreign
participation in China’s onshore equity and bond markets was onlyaround 3% - 4% as of the end of 2019, far less than comparable
market peers.
To further accelerate foreign participation in Chinese financial
markets, the Chinese government has announced a series of measuresat the central and local levels to expand access to international
investors, which, among others, advance the deadlines for removing
foreign shareholding caps in several financial industries andencourage foreign investment in asset and wealth management
industries.

T: +86 21 6080 0966
M: +86 186 0175 1666
E: yin.ge@hankunlaw.com
Yin Ge is a Shanghai-based partner atHan Kun Law Offices and a renowned
legal expert on asset management andfinancial services in China. Before
joining Han Kun, Yin worked at Clifford
Chance LLP and led the firm’s financial
services practice in Shanghai. Yin is an Asia-Pacific LeadingCounsel recognized by Legal 500 for Investment Funds andFinance areas. She is also named one of China's Top 15 Women
Lawyers by LEGALBAND for 2021. Yin received an LLM withhonors from Cornell University. She is admitted in the PRC andthe NewYork State.
Yin has extensive experience in representing international asset
managers, financial institutions, central banks, sovereign wealthfunds and trading platforms on various cross-border investment
initiatives, such as R/QFII, R/QDII, QDLP/QDIE, Stock
Connect, Bond Connect, Mutual Recognition of Funds, setting
up WFOE PFM, WFOE FMC and foreign-controlled wealthmanagement joint venture companies. She has also been deeply
involved in advising on legislation and regulation of China’s asset
management and financial services sectors.

The near term has shown great potential for the future growthof Chinese onshore equity and bond markets, given the underownership of Chinese securities, continuous opening-up measures,
outperformance of China A-shares and the Chinese high-yield bondsin the low global interest rate environment.

II. Cross-border business opportunities for
global asset managers
A. Access to Chinese securities markets(i) R/QFII schemes

To further accelerate foreign
participation in Chinese financial
markets, the Chinese government hasannounced a series of measures atthe central and local levels.

The Qualified Foreign Institutional Investor (QFII) scheme wasintroduced in 2002, which was followed by the 2011 launchof its sibling scheme, the RMB Qualified Foreign InstitutionalInvestor (RQFII). Both QFII and RQFII schemes enable
qualified foreign investors to access Chinese onshore securities
markets within a quota granted by the State Administration ofForeign Exchange (SAFE). With PRC regulators’ efforts over
the years and with the intent to reinvigorate interest in the R/
QFII scheme, the QFII and RQFII schemes went through anumber of substantial developments and liberalization in 2020,and were officially merged as of 1 November 2020.
1 For purposes of this article, “China” refers to Mainland China, excluding theHong Kong Special Administrative Region, the Macao Special Administrative Region, and Taiwan.

In 2020, the R/QFII quota restrictions were abolished and R/
QFIIs may now freely choose the amount of investment capitaland the timing and currency in which investment capital will
be remitted into China. The process for repatriation was also
simplified to remove the need for a special audit report forroutine repatriations. The R/QFII scheme, upon its merging,lowered the bar for eligibility by removing the track recordand AUM requirements. Most notably, the investment scope
was expanded to include, among others, private investment
funds, commodity futures, financial futures, options, margin
trading and securities lending, while some of these products
made available for investment still await regulatory approval ormarket testing.

R/QFII’s investment scope has been
expanded to include, among others,
private investment funds, commodityfutures, financial futures, options
and margin trading and securities
lending.

onshore fixed-income products, i.e. the Bond Connectscheme, which allows foreign investors to engage in onshore
cash bond trading in the CIBM under the northbound trading
link, and the CIBM Direct Access scheme, which allows
foreign investors to invest in cash bonds in the CIBM andengage in bond lending, bond forwards, interest rate swaps
and forward rate agreements for hedging purposes. Among
all the cross-border investment schemes for foreign investors,
only R/QFIIs are allowed to trade in the exchange-tradedbond market.
To promote the unity of the two bond markets, in July
2020, the People’s Bank of China (PBOC) and the China
Securities Regulatory Commission (CSRC) jointly
announced their approval of inter-connectivity between theCIBM and exchange-traded bond market infrastructure
institutions, so that qualified investors in the CIBM andexchange-traded bond market may trade bonds in theother bond market. The regulators are still working
together on the implementing details of the connect schemeand the specific launch date has yet to be announced.
In September 2020, PBOC, CSRC and SAFE further issued aconsultation draft of an announcement which intends toallow foreign investors to access the exchange-traded bondmarket if they have already had access to CIBM, either under
the CIBM Direct Access or Bond Connect scheme.
(iv) Access to Chinese futures markets

In addition to the R/QFII scheme, which enables foreign
investors to trade onshore listed shares, Stock Connect waslaunched between Hong Kong and Shanghai in 2014 andbetween Hong Kong and Shenzhen in 2016, which enables
foreign investors to invest in Chinese-listed shares via
connections between stock market infrastructures. Whileforeign investors under the Stock Connect may only invest
in listed shares that are constituents of certain indices or thathave H-share counterparts listed in Hong Kong, R/QFIIs have awider selection of investable shares, including all listed sharesin China.
On 27 November 2020, Shanghai, Shenzhen, and Hong Kongstock exchanges jointly announced an expansion of the scope ofeligible securities under the Stock Connect scheme to include
shares listed on the Sci-Tech Innovation Board (STAR) for
northbound trading, and pre-revenue biotechnology companies
listed in Hong Kong for southbound trading. The expansion isexpected to be implemented in early 2021 after the completionof market preparation.
(iii) Access to China’s bond market
China’s bond market comprises two major markets, theChina Interbank Bond Market (CIBM) generally representing
over 95% of the total market share and the exchange-tradedbond market, which have distinct characteristics and apply
different sets of rules. As of today, in addition to the R/
QFII scheme, China has launched two additional crossborder investment schemes for foreign investors to trade

On 26 March 2018, China launched RMB-denominated crude
oil futures on a domestic futures exchange and for the firsttime designated it as a futures product available for trading byforeign investors, which marked a milestone development forthe opening up of Chinese futures market. Following crudeoil, China has been accelerating the opening of its commodity
futures market. As of today, China has launched and designatedseven commodity futures products available for trading byforeign investors, namely, crude oil, iron ore, PTA, low sulfur
fuel oil, TSR-20, copper and RBD palm olein.
Separately, R/QFIIs are allowed to trade onshore stock index
futures for hedging purposes. For other futures products(including long-awaited treasury futures products), eventhough R/QFIIs have in principle been allowed to tradecommodity futures and financial futures, the specific futures
products permissible for trading and trading methods still await
regulators’ final green light.
(v) Access to Chinese foreign exchange derivatives markets
With the opening up of Chinese securities markets to foreign
investors and the allocation of RMB-denominated assets, China
has noticed the increasing demands of foreign asset managers
to hedge their foreign exchange risk exposures and has taken
several measures to better facilitate risk management.
On 14 February 2020, Chinese financial regulators permitted
the use of internationally prevalent ISDA master agreements
to document onshore foreign exchange derivative transactions,while previously foreign investors were required to enter
into a Chinese counterpart master agreement prepared by theNational Association of Financial Market Institutional Investors(NAFMII), which may be unfamiliar to foreign investors.

Separately, foreign investors, either under the R/QFII scheme or
CIBM Direct Access scheme, have been given a wider selectionof their counterparties to conduct foreign exchange derivatives
transactions in 2020, which had been limited to their respective
custodian/settlement agent. Further, foreign investors under theCIBM Direct Access scheme may obtain access to the China
interbank foreign exchange market through a prime broker
beginning 1 February 2020.

followed by similar schemes launched in other major cities in
China such as Beijing and Shenzhen. Such local programs areintended to permit foreign asset managers to set up onshorewholly foreign-owned enterprises (WFOEs) to act as themanager of onshore QDLP funds and to raise capital fromdomestic qualified investors and invest in offshore markets.
The QDLP schemes are subject to investment quotas granted bySAFE.

With the above measures, foreign asset managers have been
given much easier access to onshore foreign exchange hedging
instruments and at more competitive prices.

SAFE announced on 29 November 2020 that it will grant morequotas under the QDLP schemes to meet domestic investors’
global asset allocation needs, and will also support the launch of
QDLP schemes in Chongqing and Hainan.

(vi) Wealth Management Connect(iii) Southbound Bond Connect
On 29 June 2020, the PBOC, Hong Kong Monetary Authority(HKMA), and Monetary Authority of Macao jointly announced
the launch of a pilot scheme, the Wealth Management Connect.
The northbound connect will enable Hong Kong and Macao
residents in the Guangdong-Hong Kong SAR-Macao SAR
Greater Bay Area (GBA) to open designated investment
accounts with banks in Mainland China and invest in eligible
wealth management products distributed by such banks.
The three authorities are currently working closely to formulate
the implementation details with a view to rolling out the schemeas soon as practicable, but the specific timetable is yet to beannounced.
(vii) More connect schemes to comeAn HKMA official recently recognised the success of connect
schemes between Mainland China and Hong Kong financial
markets, namely Stock Connect and Bond Connect schemes,
and stated that HKMA is attempting to launch more connect
schemes for other asset classes, such as stock and bondderivative products, to meet the increasing demands of foreign
asset managers to hedge risk exposures from holding RMBdenominated assets.
B. More outbound investment from PRC investors
Amid the two-way opening up of Chinese financial markets,
Chinese regulators have also been striving to promote crossborder investment by domestic investors into offshore markets.

Given the success of the Northbound Bond Connect, PBOC andHKMA are currently studying the launch of the Southbound
Bond Connect at an appropriate time to enable mainland
investors to invest in Hong Kong bond markets, with the specificlaunch date unspecified.
(iv) Wealth Management Connect
Similar to the northbound connect under the WealthManagement Connect scheme, the southbound connect will
enable mainland individual residents in the GBA to invest ineligible wealth management products offered by Hong Kong or
Macao banks. The launch of the Wealth Management Connect
marks another important milestone for the China’s capital
account liberalisation after the Stock Connect and Bond Connect
schemes.

III. Setting up an onshore presence toconduct asset management business locallyIn addition to cross-border investment, China has also put inplace measures to attract foreign asset managers to set up onshorepresences, conduct local-to-local asset management business, andbring in international talent and best practice.
In 2016, foreign asset managers were allowed to set up onshore
WFOEs to register as private securities investment fund managers(PFMs), which may raise capital from domestic qualified investors
and invest in domestic securities markets.

(i) QDII scheme
The Qualified Domestic Institutional Investor (QDII) scheme
was launched in April 2006, which enables qualified Chinese
financial institutions to invest in offshore markets. On 30November 2020, SAFE announced that it would grant newQDII quotas to approved QDIIs, after which a total of USD
116.7 billion in investment quotas were granted to 169 QDIIs,including, fund management companies (FMCs) and wealthmanagement companies (WMCs). This is the third time in 2020
that SAFE has granted new QDII quotas, which shows SAFE’s
intent to encourage the outbound cross-border investments.

On 20 July 2019, the Financial Stability and Development Committee(FSDB) announced 11 key measures to further open up Chinese
financial markets (the “11 Measures”), which also attach great
importance to the asset/wealth management industry and the relevant
specific policies include, among others:(i) the deadline for removing the foreign shareholding cap
for securities companies, FMCs, and futures companies wasadvanced by a year to 2020;(ii) foreign financial institutions are encouraged to invest in thewealth management subsidiaries of Chinese commercial banks;(ii) QDLP schemes
Since 2012, Qualified Domestic Limited Partnership (QDLP)
scheme as a pilot local program has been launched in Shanghai,(iii) foreign asset management companies are allowed toestablish foreign-controlled WMCs with the subsidiaries ofChinese banks or insurance companies;

(iv) foreign financial institutions are allowed to establish orinvest in pension fund management companies; and(v) the foreign shareholding cap is lifted for insurance asset
management companies (i.e. 25%).
Pursuant to Article 4.7 of the Economic and Trade greement
Between the Government of the People’s Republic of China andthe Government of the United States of America, signed on 15
January 2020, China committed to eliminating foreign equity caps insecurities, fund management and futures services by no later than 1April 2020.
To implement the China-U.S. trade agreement and the 11 Measures,the foreign shareholding cap for securities companies, FMCs andfutures companies were officially lifted as of 1 April 2020.
As of today:(i) in the PFM WFOE industry, 33 foreign players havesuccessfully secured PFM licenses and are allowed toengage in private securities investment fund managementbusinesses;(iii) in the wealth management industry, Amundi anda subsidiary of the Bank of China (BOC) have received approval
from the China Banking and Insurance Regulatory Commission(CBIRC) to set up a joint venture, Amundi BOC WealthManagement Company Limited, with Amundi and BOC holding
55% and 45% stakes, respectively, which commenced operationsin September 2020. BlackRock, Temasek’s subsidiary Fullerton,and a subsidiary of China Construction Bank (CCB) received
CBIRC approval in August 2020 to proceed with preparatory
work for setting up a wealth management joint venture, withBlackRock holding a 50.1% stake, CCB holding 40%, andFullerton holding the remaining 9.9%;(iv) in the pension fund management industry, as it is still atearly stages of development, CCB Pension ManagementCo., Ltd., the joint venture between CCB and the National
Council for Social Security Fund is the first and only
pension management company in China. Those twoshareholders have offered to transfer partial stakes
to a foreign asset manager, but the specific transferee is
yet to be determined.

The foreign shareholding caps
for securities companies, fundmanagement companies and futurescompanies have been officially lifted
as of 1 April 2020.

With a view to attract foreign asset managers and cultivate morefriendly and international business environments, Chinese regulators
have issued a series of favourable policies at the central and local
levels to support the establishment and development of Shanghai
as a global asset management centre, and have explicitly provided
that Shanghai is the top priority for piloting all financial policies
in support of free and convenient investments. As of today, 29 outof 33 PFM WFOEs are located in Shanghai and around half of thetop 50 global asset managers have set up an onshore presence inShanghai and engaged in asset management business. We believe theprosperous Chinese asset management market will incentivise moreglobal asset managers to expand their footprint into Shanghai, andShanghai is more than willing to embrace their coming.

(ii) in the FMC industry, BlackRock has successfully obtained
CSRC approval to establish a wholly-owned FMC, and fourother foreign players have filed applications with CSRC and are

We have been advising many international asset managers andfinancial institutions on various China-related initiatives as firstmovers in response to China’s financial market liberalisation policies.
We have also been deeply involved in the relevant legislation process
while China’s regulatory environment continues to evolve. The
business developments opportunities in China are unprecedented andshall not be underestimated.

and AllianceBernstein;