China’s measures to further encourage QDII investment

Appointment of Offshore Advisor

Article 14 of the provisional QDII regulations state that “a QDII may appoint an overseas investment consultant (OIC) that has been approved to engage in investment management business by the local regulatory authority and the local securities regulatory authority has signed a bilateral regulatory cooperation MOU with the CSRC and it has engaged in the investment management business for five years and in the most recent financial year it had securities assets under its management of not less than US$10 billion”.

When an OIC is made responsible for making investment decisions, the agreement must specify that the OIC shall bear joint liability in the event that the property suffers a loss as a result of negligence as a result of negligence, failure to perform its duties, or any errors on the part of the OIC (Article 17).

CSRC's Requirements on Offshore Advisors

CSRC encourages Chinese FMCs to engage offshore advisors for the QDII funds although offshore advisor is not legally required under the QDII regulations. Offshore Advisors are required to provide advisory services, but they should not seek discretionary management of the QDII fund.

Offshore Advisors are allowed to provide dealing services with QDII Fund, but it is important to keep in mind that it is the policy objective and the wish of the CSRC to see Chinese FMCs and fund managers picking up skills, knowledge and experience in crossborder securities dealing and investment under the QDII program. Each QDII fund may have one or more offshore advisors and each offshore advisor can be engaged by, at most, two Chinese FMCs.

Each QDII fund, as opposed to each Chinese FMC, should appoint its own offshore advisor. The offshore advisor shall comply with the relevant PRC laws, which are stipulated in the QDII investment advisory agreement.

Chinese FMC's Expectations on Offshore Advisor's Services

In appointing Foreign Advisors as their QDII offshore investment advisors, Chinese FMCs would expect to learn from their offshore advisors experience in market analysis, asset allocation, industry allocation, securities selection, performance attribution, investment model and investment decision making procedure, etc. Chinese FMCs would also be looking to work with and learn from their offshore investment advisors leading expertise and experience in product design and development. On-site training and staff exchange program are also expected to be put in place between the Chinese FMCs and the offshore investment advisors before/ after the signing of the investment advisory agreement.

Opportunities & Challenges for Offshore Advisors

By securing an offshore advisor mandate from a Chinese FMC, the Foreign Advisor can participate in and reap benefit from the growth and development of the Chinese market.

The mandate also provides a way for Foreign Advisors who do not have an asset/fund management platform in China to enter into the ever growing Chinese asset management market to expand their business and to build their presence and profile. Working as a QDII offshore advisor also provides the Foreign Advisor with the opportunity to understand more about the domestic Chinese market, the regulators and the local investors.

Last but not least, it is imperative for the Foreign Advisors to work with the right legal advisors with solid experience and a proven track record to negotiate and secure the offshore advisor mandate. Advisors with first hand experience and a proven track record in advising Chinese FMCs and international asset managers/financial institutions on QDII investment and the negotiation/ completion of the offshore advisor mandate would be a huge plus to Foreign Advisors in their efforts to secure the elusive and the all important first mandate from Chinese FMCs – having secured the first mandate would provide them with a clear advantage over their rivals in winning future mandates from Chinese FMCs and QDIIs as and when the QDII program continues to expand in the future.

Yuan Tai advised ICBC-Credit Suisse Asset Management Co., and China Southern Fund Management Co. on their first QDII product launch.

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