Market Access Report: Securities & Funds

To implement China's WTO commitments, the China Securities Regulatory Commission (CSRC) recently issued the Establishment of Fund Management Companies with Foreign Equity Participation Rules and Establishment of Securities Companies with Foreign Equity Participation Rules. The Shanghai and Shenzhen stock exchanges have also issued rules allowing foreign securities companies to trade B shares and for their China representative offices to become special members of these stock exchanges.

However, other than those described above, China made no specific WTO commitments in the areas of investment banking and asset management, and those commitments already made contain some important omissions. For example, under the rules promulgated by the CSRC, a JV securities company cannot trade A shares, whether for itself or on behalf of its client. Further, it does not appear that either a JV securities company or a JV fund management company could offer asset management services on behalf of its institutional or individual clients. Finally, given China's unsettled legal framework for what is commonly referred to as "private placements" in some other jurisdictions, it is perhaps unlikely that a JV securities company could offer domestic private placement financing services, whether for public or private companies.

PBOC & CSRC Regulations

Nevertheless, the foreign financial community can take some solace from two sets of regulations recently issued by the People's Bank of China (PBOC): the Administration of Trust and Investment Companies Procedures (issued and effective June 5) and the Administration of the Business of Holding Funds in Trust of Trust and Investment Companies Tentative Procedures (issued June 26 and effective July 18). Under these PBOC regulations, a trust investment company may launch investment funds or fund management companies. It may underwrite government and corporate bonds. It may indirectly engage in the underwriting and trading of stocks. It may offer what is essentially private placement financing by setting up a collective trust with funds from 200 investors with each investor contributing no less than Rmb50,000 (the 200-investor hurdle could perhaps be overcome by offering more than one trust for the same purpose). Finally, the regulations specifically allow a trust investment company to provide services relating to corporate mergers and acquisitions, restructuring, and project financing.

It is worth noting that the CSRC issued a circular at the end of 2001 allowing domestic securities companies to engage in trust investment businesses. The CSRC is also reportedly considering allowing domestic fund management companies to offer trust investment services. However, it is unclear whether the CSRC intends to eventually allow foreign-invested securities companies and foreign-invested fund management companies to offer these services. In any event, the scope of the trust investment services presently allowed by CSRC appears to be limited. Under PBOC rules, a trust investment company can manage property and property rights relating to "real estate, personal property and intellectual property", whereas under CSRC rules a securities company offering trust investment services can only manage cash and securities, and can only invest in publicly traded securities and their "derivatives".

A number of international financial institutions have expressed an interest in investing in trust investment companies or in setting up joint ventures. Shanghai AJ Trust & Investment Co., Ltd, which has attracted a great deal of attention around the country for its daring and successful launch in July 2002 of China's first ever "trust investment programme" that invests trust funds in a Shanghai infrastructure project, is reportedly considering proposals from several foreign suitors.

Conclusion

A senior PBOC official recently stated that even though the opening of the trust investment sector had not been discussed during negotiations leading up to China's WTO accession, the PBOC is considering rules relating to foreign participation in trust investment companies. It will be interesting to see whether a foreign-invested trust investment company, if approved, could have the same business scope as its domestic counterpart, and if PBOC will allow foreign investors to own more than 33% of a trust investment company, which is currently the limitation for foreign investment in securities and fund management companies. If so, the foreign financial community may find the Chinese market to be more interesting than was originally anticipated by China's more limited WTO commitments.

By Mitch Dudek and Kan Liang,
Jones, Day, Reavis & Pogue, Shanghai