A wholly-foreign owned enterprise (WFOE) is "the most fitting vehicle" for foreign asset managers to do business onshore in mainland China, says a research firm.
Despite a lack of clarity over the permissible activities of such vehicles, they have many advantages over local joint ventures, in which foreign asset managers have in the past been allowed no more than a 49% stake, says Cerulli Associates.
Nevertheless, the lack of direction from Chinese regulators regarding WFOEs has left some firms "baffled", especially as these vehicles are overseen by the Ministry of Commerce and not the China Securities Regulatory Commission (CSRC).
"The most obvious way of interpreting this is that structuring of products directly by the WFOE is not allowed within the mainland, except under certain circumstances such as when QDLP (Qualified Domestic Limited Partnership) or QDIE (Qualified Domestic Investment Enterprise) quotas are used, in which case the WFOE will act as a private fund manager for offshore investments," says Evonne Gan, an analyst with Cerulli who co-led the China research initiative.
Aberdeen Asset Management recently made headlines when it was granted a WFOE licence that appears to allow it to operate as a private securities firm in China. Although asset managers have been granted WFOEs in the past, the licences typically specified limited powers.
However, Hugh Young, managing director of Aberdeen's Asian business, is taking a cautious tone. "While we welcome China's steady market opening and we're thrilled to gain our WFOE licence, we will proceed slowly."
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