Building Shanghai Global Asset Management Center - Further Expansion of the QFLP Pilot Program

July 2021

Introduction

A decade has passed since Shanghai launched the first Qualified Foreign Limited Partnership (“QFLP”) pilot program (the “QFLP Pilot Program”) in China. As of the end of 2020, more than 70 institutions have participated in the QFLP Pilot Program, investing nearly RMB 40 billion across a wide range of sectors, including biopharmaceuticals, environmental protection and information technology. Since the introduction of the “Measures for Implementing the Pilot Program for Qualified Foreign Limited Partnership in Shanghai” (No.38 [2010] of the Shanghai Financial Services Office) (the “Shanghai QFLP Measures”), various aspects of the QFLP Pilot Program, such as the management model, investment scope and investment methods have over time evolved and matured. Nowadays, the QFLP Pilot Program has become a predominant route for foreign investment to enter into China in addition to the traditional foreign direct investment (FDI) route. On 14 May 2021, the General Office of Shanghai Municipal Government issued “Several Opinions on Accelerating the Construction of Shanghai Global Asset Management Center” (the “Opinions”) to further expand the QFLP Pilot Program, including its investment scope and investment methods. This article will introduce the current policies and practices of the QFLP Pilot Program in Shanghai.

QFLP Related Entities

QFLP Manager: A foreign-invested equity investment management enterprise which may be formed as a company or a limited partnership. A QFLP manager must meet the requirements of the Shanghai QFLP Measures on the number of its investors, senior management qualifications and minimum amount of registered capital (or subscribed capital) etc. Further, private fund managers established in China (including foreign private fund management institutions with presence in China) are required to register in accordance with the requirements of the Asset Management Association of China (the “AMAC”) and to file the private funds under their management with the AMAC for record.

QFLP: Qualified Foreign Limited Partnership. Foreign private equity (PE)/venture capital (VC) and other overseas investors may use QFLP in the form of a limited partnership as a platform to invest in China. It should be noted that QFLP is required under the Shanghai QFLP Measures to comply with the relevant laws and regulations in China including the foreign investment policies. A QFLP’s investment in China is subject to the investment restrictions as stipulated in the negative list for the access of foreign investment.

QFLP Foreign Investors: Comprise mainly of insurance companies, banks, securities houses, funds (including sovereign funds, pension funds, endowment funds, charity funds, funds of funds (FOF) etc.) and other foreign investors as authorised by the Cross-department Meeting (as defined below). The Shanghai QFLP Measures set out the requirements on, among others, the qualifications, internal control system and investment quota of foreign investors. Further, the capital contributions of foreign investors must be denominated in a currency freely convertible in China, the RMB profits obtained in China or the RMB income legally obtained from activities such as share conversion or liquidation.

QFLP Domestic Investors: The capital contributions of domestic investors must be denominated in RMB. The Shanghai QFLP Measures impose no other restrictions on domestic investors in participating in the QFLP Pilot Program.

QFLP Pilot Program Application Procedures

The application process of the QFLP Pilot Program generally involves the following steps:

1. Application and Approval

Applicant for QFLP and QFLP manager, through the QFLP or the proposed general partner of the QFLP, to submit the application documents to the Shanghai Municipal Financial Regulatory Bureau (the “SFRB”, formerly known as the Shanghai Municipal Financial Services Office)
A cross-department meeting comprising, among others, the SFRB, the Municipal Commission of Commerce, the Municipal Administration for Market Regulation and the Shanghai Municipal Development and Reform Committee (the “Cross-department Meeting”) will be held to review and approve (where applicable) the application
QFLP to appoint a qualified domestic bank as custodian of its assets
SFRB to notify the applicant in writing of the application results, carbon copied to the relevant members of the Cross-department Meeting and the custodian bank

2. Registration and Filing

QFLP to complete the business registration formalities within six months after receiving the approval for the QFLP pilot qualification
QFLP to complete the foreign exchange registration with the Shanghai Branch of the State Administration of Foreign Exchange and other foreign exchange related formalities such as seeking authorization to bank accounts after receiving its business license
QFLP to file the fund with the AMAC
QFLP manager may make contribution to the QFLP with foreign currency denominated capital after receiving the approval for the QFLP pilot qualification
QFLP to process the formalities of domestic investment of foreign currency denominated capital with the custodian bank

Management Model

Shanghai has fully expanded the management model of QFLP funds. In addition to the initial model of “a foreign-invested QFLP Manager manages a foreign-invested QFLP fund”, the models of “a foreign-invested QFLP Manager manages a domestic QFLP fund” and “a domestic QFLP Manager manages a foreign-invested QFLP fund” are also now available.

1. “A foreign-invested QFLP Manager manages a foreign-invested QFLP fund”

It principally refers to the management model whereby foreign investors establish a QFLP Manager in the QFLP pilot zone in which the QFLP Manager raises foreign capital to set up a QFLP fund. Such QFLP manager does not have to register with the AMAC.

2. “A foreign-invested QFLP Manager manages a domestic QFLP fund”

It principally refers to the management model whereby foreign investors establish a QFLP Manager in the QFLP pilot zone where the manager raises domestic capital to set up a QFLP fund. Such QFLP fund needs to comply with the relevant regulations of the AMAC applicable to funds as it proposes to raise RMB capital onshore.

3. “A domestic QFLP Manager manages a foreign-invested QFLP fund”

It principally refers to the management model whereby a domestic fund manager manages a foreign-invested QFLP fund. Whilst this management model is currently not the focus of the Shanghai QFLP Pilot Program, other pilot zones have issued relevant policies to regulate this model, opening rooms for further exploration of this model.

Investment Scope

Pursuant to the Opinions, the acceptable investment scope of a Shanghai QFLP includes private equity, venture capital funds, private placement and mezzanine funds, convertible bonds, special assets and distressed debts.

Whilst the Shanghai QFLP Measures have generally confined QFLP to investing in domestic private equity and restrict QFLP from trading stocks and corporate bonds in secondary market or dealing with financial derivatives such as futures, the Opinions expand the investment scope of QFLP and, in particular, allow QFLP to invest in listed companies through private placement, thereby opening more room for foreign PE/VC and other overseas investors to participate in China’s capital market.

The inclusion of distressed debts in the investment scope of QFLP also enables experienced foreign PE/VC and other overseas investors to access China’s distressed debts market which the financial regulators have been actively promoting. To participate in the distressed debts market in the form of QFLP rather than in the form of a company would also help foreign investors lower the tax burdens.

Conclusion

It is mentioned in the Opinions that Shanghai strives to construct a comprehensive, open and internationally recognised asset management hub in Asia by 2025. Since the launch of the Shanghai QFLP Pilot Program, with the active participation of foreign investors, the gradual simplification of application procedures and broadening of investment scope, the last decade has seen the QFLP Pilot Program becoming one of the most important routes for foreign investment to enter into China. The Shanghai QFLP Pilot Program is also an important aspect in the construction of Shanghai Global Asset Management Center.

Pan Gongsheng, Deputy Governor of the People’s Bank of China and Director of the State Administration of Foreign Exchange, stated at the Lujiazui Forum on 10 June 2021 that, with the aim of promoting the reform in cross-border investment of private equity investment funds and constructing Shanghai as a global asset management center, it is proposed that a new QFLP pilot program will be launched in the Lingang Special Area of the Shanghai Free Trade Zone. It is believed that the financial regulatory authorities will soon grant further preferential and favourable policy concessions to the new QFLP pilot program in Shanghai.