Author Archives: VTCo

Abolition of Quota Requirements for QFII/RQFII

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Although this was indicated as being on the cards, China has surprised the global investment community with an unexpected formal announcement to abolish the quota requirements under the QFII and RQFII regimes.   The China Statement Administration of Foreign Exchange (SAFE) published its statement on 10 September 2019 referring to this strategic policy decision as a measure of further opening up.

The framework for qualified foreign institutional investors (QFII) is the program first introduced in 2002 to allow foreign investment (and foreign exchange) into the onshore equities market in China for China A Shares listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange, and to-date other domestic securities and investment instruments, under China’s strict foreign exchange controls.  RQFII is the corresponding framework for offshore Renminbi in place since 2011.   

Since the first implementations of the frameworks, foreign institutional investors including asset managers, pension funds, foundations, banks, securities firms and insurance companies as well as foreign sovereign wealth funds have to apply for specific quota limits on the amount of investment allowed into China, besides obtaining a QFII or RQFII licence subject to meeting relevant eligibility requirements.   The quota requirements adopted under QFII and RQFII programs have been under SAFE’s management and oversight as part of foreign exchange controls and balance of payments.  

According to SAFE’s statement, going forward, qualifying QFIIs and RQFIIs would only need to undergo a registration process to freely remit funds into China for investment in the domestic securities markets.  This is intended to enable international investors to more easily and more broadly participate in the China bonds and stock markets.  

The abolition of quota is certainly a significant event in the evolution of the frameworks since its first implementations.   Over the years and having been through several key milestone initiatives, we have seen the changes from the earlier days when the QFII program was highly restricted in terms of eligibility conditions and availability of quota, as well as questions around custody and ownership that are now considerably established.  The global investment community who have invested in the China market under QFII and RQFII has lived through challenges on quota management, tax compliance, repatriation limits and related liquidity risks.   Many of these issues have now been largely liberalised or addressed under both QFII and RQFII programs.

This should be an interesting prospect for investment managers and other global investors who wish to further allocate into China A Shares and other domestic securities, perhaps in line with the inclusion and increase in weightage in global indices such as MSCI.   We believe the removal of quota limits could spur development of index-tracking exchange-traded fund products and also more investment by such products into China A Shares, with flexibility to operate without quota constraints.

More details are required, however, and SAFE states that it is in the process of seeking the approval of the China State Council regarding the administrative measures and further announcement.     

Global managers and institutional investors should closely watch this space for updates on the timing and manner in which existing quota system would transition, the proposed registration system that would replace the quota requirements, any corresponding changes regarding repatriation, or other account management issues.

Vivien Teu & Co LLP is experienced in advising investment managers on offshore investment products (such as retail funds authorised by the Hong Kong Securities & Futures Commission or private funds) that invest in China A Shares or domestic market through QFII / RQFII programs (or other cross-market channels such as stock connect or accessing China Inter-bank Bond Market). We would be happy to assist if you have any questions or wish to discuss the subject matter of this update. 

ICLG Alternative Investment Funds 2019 – Hong Kong

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Vivien Teu & Co LLP is pleased to continue our contribution of the Hong Kong Chapter this year to the International Comparative Legal Guide (ICLG) on Alternative Investments Funds 2019, published by Global Legal Group.

Our authors Vivien Teu and Sarah He provide an overview of recent changes and updates to available legal structures, regulatory developments and market trends shaping private investment products and distribution issues in Hong Kong, as well as new legislation this year that expanded the Hong Kong profits tax exemption for private funds while the global tax environment increases emphasis on operational substance.

The chapter is available online at: https://iclg.com/practice-areas/alternative-investment-funds-laws-and-regulations/hong-kong

For a print version of the chapter:

ICLG-AIF19-Hong-KongDownload

ESG Reporting

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Last month we submitted our response to the HKEX consultation on a review of the existing ESG Reporting Guide and related Listing Rules for Hong Kong listed companies. We applaud the general direction of the review which is to improve quality of ESG reporting through tightening board oversight of ESG integration, elevating all social-related disclosures to “comply or explain”, and requiring disclosures to go beyond policies to cover processes as well.

In our response, we set out our suggestions where we think the regulator could do more, such as to align the ESG Guide with the Corporate Governance Code and the Companies Ordinance on board’s role in overseeing ESG integration, and considering a statement to acknowledge board duties. We also suggested more emphasis on social factors besides environment factors, such as referencing latest international regulatory developments in relation to Modern Slavery and other business and human rights considerations. We proposed that HKEX to also consider providing capacity and sector-building support for the ecosystem to better identify material ESG risks, and to provide a supplement to the ESG Guide of international standards that are updated regularly for companies to reference and to continue strengthening their reporting.

One big dilemma in the field of sustainable investing is that there is no one standard reporting framework. Companies seeking to be leaders in sustainability may spend significant time on their disclosures and navigating different measures, while others may be laggards just “checking the box” – all resulting in inconsistency of information disclosed.

A McKinsey report this month found that “investors say they cannot readily use companies’ sustainability disclosures to inform investment decisions and advice accurately”. Of the respondents surveyed a total of 89% of investors and 86% of corporate executives think there should be fewer sustainability reporting standards. Meanwhile, 82% of investors, and 66% of company executives, think companies should be required by law to issue sustainability reports.

Increased regulation in relation to ESG reporting is a global trend, while the challenge is to establish a common framework to bring as many companies on board, and to provide sufficient guidance for companies to follow higher standards.

Watch this space as the HKEX shares the results of its consultation.

Chambers Practice Guides – Investment Funds 2019 – Hong Kong

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Vivien Teu & Co LLP is delighted to have been invited to contribute to the Chambers & Partners Global Practice Guides, on the Trends & Developments for Investments Funds 2019 for Hong Kong.

We welcome feedback, comments and questions on our write-up, and look forward to working together as the funds market evolves and develops.

https://practiceguides.chambers.com/practice-guides/investment-funds-2019/hong-kong/trends-and-developments

Remote onboarding

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On 28 June 2019, the Securities and Futures Commission of Hong Kong (“SFC”) issued (i) a circular to intermediaries on ‘Remote onboarding of overseas individual clients’ (“the Circular”), and also (ii) a circular on corresponding amendments to paragraph 5.1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”). The amendments to the Code of Conduct took effect on 5 July 2019. As technology advances, more and more business activities take place online. As such, SFC set out new approaches for opening accounts under such development.

In this publication, we refer to the SFC’s current published list of acceptable approaches, with an outline of the required steps for remote onboarding of overseas individual clients when licensed or registered persons engage in providing services online in securities or futures business.

 

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AVPN Annual Conference

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“Breaking Boundaries” 

Last week our team participated at the annual gathering of AVPN (Asian Venture Philanthropy Network) – an incredible opportunity to interact with over 1000 impact actors and stakeholders across the region: among impact investors, funders, social enterprises, social innovators, asset managers, service providers, foundations and government agencies.   

Climate Action, ESG and Impact Investing are key themes this year. While global foundations shared their impact and social innovation programmes, Standard Chartered chairman Jose Vinals gave a keynote speech emphasising the central role banks can play in furthering sustainable finance, and how finance is a powerful tool for change, from doing no harm to actively doing good.  Financial market players including banks, asset managers and impact funds can make a real difference.   

There’s an annual 2.5 trillion gap in investment globally to meet the UN Sustainable Development Goals by 2030.  As an international financial center, Hong Kong has a critical role to play.

We are glad to be a member of #AVPN and to have been at #avpn2019.  Collaborate and strengthen ESG focus and sustainable finance.

#esginvesting #impact #UNSDGs

Enhanced Requirements on Complex Products

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From 6 July 2019, the Guidelines on Online Distribution and Advisory Platforms (“Guidelines on Online Platforms”) issued by the Securities & Futures Commission (“SFC”) would become effective, within which outlines the SFC’s further guidance on the expected conduct requirements on intermediaries offering investment products on online platforms, and where the SFC introduced specific requirements with respect to investment products that are “complex products”. Correspondingly, a new paragraph 5.5 in the SFC Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”) shall apply to all intermediaries (online or offline) in providing services in complex products. Paragraph 5.5 of the Code of Conduct will also take effect on 6 July 2019.

In this update, we provide an overview of the enhanced requirements that would apply under which investment products may be categorised as complex products, in respect of which intermediaries would need to ensure suitability of the product to its clients and provide expected disclosures of minimum product information and warning statements. Intermediaries and fund managers should be taking actions including legal and regulatory review of their service offerings, product due dilience processes and product disclosures in preparing for compliance with the requirements.

Enhanced Requirements on Complex ProductsDownload

Expert Guide – Investment Funds 2019

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Vivien Teu & Co LLP is pleased to have been invited by Corporate Livewire to contribute a Hong Kong chapter to its Expert Guide series – Investment Funds 2019.

Access the full guide at Corporate Livewire (registration required): http://www.corporatelivewire.com/guide.html?id=investment-funds-2019

Here’s a copy of our Hong Kong chapter:

Corporate-Livewire-Expert-Guide-Investment-Funds-2019-Hong-KongDownload

聚焦香港资产管理

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香港的资产管理和基金行业在开放式基础框架下发展成熟并取得成功。这不仅反映在香港接纳和认可基金经理的海外资格和不同市场的经验以在香港设立基金管理公司，也体现在香港对基金设立地采取的中立和不设限制的态度上。在这样的背景下，香港得以发展成为一个世界金融中心，吸引众多的国际机构和集团在此设立资产管理公司。中国大陆的基金公司也在近年纷纷加入其中，到香港来成立资产管理平台，以香港作为中心开拓境外及国际市场。

最近，香港在提升其作为国际金融中心的竞争力和巩固其作为中国大陆门户的地位方面所作的努力使得现状有所改变。国际监管和财务方面的合作也存在新的发展。 本文中我们概要聚焦香港作为一个国际资产管理中心在资产管理领域的主要特点和变化，为资产管理机构将香港纳入其全球策略提供一定的参考依据，并希望有助考虑在香港展开业务的资产管理人探讨香港的潜在新优势。

聚焦香港资产管理Download

Focus on Hong Kong Asset Management

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Hong Kong has a well-established asset management and funds industry that has been successful under an open architecture framework. This spans from being accepting of fund managers’ overseas qualifications and experiences of different markets to set up in Hong Kong, to being domicile-neutral on the funds that may be offered in Hong Kong on a private placement basis or which may be approved for retail public offer. It is this backdrop that has developed Hong Kong into a financial centre where many asset management firms are set up by international groups and in recent years Mainland China fund houses.

Recently the status quo has been shaken up amidst efforts to maintain and enhance Hong Kong’s competitiveness as an international centre for funds, and also as it seeks to further capitalise and stay relevant as the gateway for Mainland China of the People’s Republic. There are also developments in the context and environment of international regulatory and fiscal cooperation. In this article written as a synopsis, we focus on the key attributes and changes that are interesting for asset managers to consider Hong Kong under their global strategy.

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This article first appeared in the Corporate Livewire “Expert Guide – Investment Funds 2019” (with necessary updates since publication). Vivien Teu & Co LLP is pleased to have been invited by Corporate Livewire to contribute the Hong Kong chapter. Access the full guide at Corporate Livewire (registration required): http://www.corporatelivewire.com/guide.html?id=investment-funds-2019