Promises Kept: The CSRC Opens the Door to Foreign Investment in Fund Management Companies

July 02, 2002 | BY

clpstaff &clp articles

The China Securities Regulatory Commission (the CSRC) has promulgated new regulations that provide a long-awaited basis1 for the creation of foreign invested fund management companies in China.

By Walter HutchensAssistant ProfessorRobert H. Smith School of Business,University of Maryland

The new FI-FMC Establishment Rules reflect specific WTO accession commitments made by China in the financial services sector and will no doubt unleash a great deal of activity as financial firms seek to participate in China's emerging investment funds industry. Indeed, nearly twenty alliances have already been formed in anticipation of the liberalization heralded by the FI-FMC Establishment Rules.2

Although many foreign financial firms welcome the market access offered by these new rules, investors should note that China is not radically reforming or opening its financial services sector. Rather, it is applying its traditional model of managing foreign investment: offering limited market access in exchange for capital, technology and know how.3

Foreign multinationals are likely, as usual, to take the bait enthusiastically, banking on the promise of a vast future market and hopes for further liberalization in China's financial sector.4 In time these hopes may be rewarded, given China's size, high individual savings rate, large supply of enterprises needing capital and the overall trajectory of reforms. However, before plunging into the PRC funds industry, foreign investors should soberly reflect on the proposition.

In particular, investors should consider a couple of key issues. First, China has issued only a limited invitation for foreign participation in China's funds industry. Compared with the CSRC's new rules on foreign investment in securities companies (see page 41 of this issue), the FI-FMC Establishment rules are liberal, allowing foreign investors to hold controlling stakes and placing no special restrictions on business scope. Still, restrictions remain in terms of approvals, investor qualifications and the requirements that Chinese partners collectively hold a much greater share than the foreign investor. Second, the securities markets and funds industry in China are fundamentally different than other environments where foreign fund managers are accustomed to operating. Each of these considerations means that the chance to add value through expertise and practices refined elsewhere may be limited.

The Door Opens

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