China bars foreign fund managers from selling products that invest offshore

Executives fear restrictions will prevent them from profiting from their main competitive advantage over local fund managers

Beijing has told global fund managers that have recently started operating independently in China that they can’t offer products that invest in global markets to wealthy local customers, according to executives from two global firms.

The verbal instruction given to foreign money managers by Chinese market regulators, known as “window guidance,” is the latest example both of Beijing’s determination to support its domestic financial markets, and of its continued wariness of rapid capital flight from the country.

Eleven global investment firms, including BlackRock Inc., Man Group, UBS AG and Schroders PLC, have gained approval to offer private investment-fund services in China since Beijing opened the door in mid-2016. Previously, such firms had to operate joint ventures with a local Chinese partner.

Fidelity International was the first to get the green light to launch products to wealthy Chinese investors in January last year. Under local rules, any Chinese individual investing in funds managed by foreign firms needs to put in at least 1 million yuan ($158,000).

“We are told that we could only sell products that invest in onshore markets, and not offshore ones, including Hong Kong’s, until we are told otherwise,” said a senior executive at one of the global investment firms.

A sales representative from another firm said China’s securities regulator has told the company none of its first three funds can invest overseas. “This basically means we can’t do anything outside China for the next two or three years and we know they are just being polite,” she said.

“At the end of the day, the regulator has to approve all our products,” the sales representative added.

The China Securities Regulatory Commission couldn’t be reached for comment.

When China fully opened the fund-management sector to foreign firms two years ago, the world’s second-largest economy was still reeling from an unprecedented stock market crash beginning in mid-2015. China’s currency was also under pressure after Beijing carried out a surprise yuan devaluation in August that year.

“The unofficial ban on launching products that invest offshore shows that the authorities are still preoccupied with protecting the local markets. The message to the foreign money managers is that they need to focus their business development inside China too,” said Ivan Shi, research director at consultancy Z-Ben Advisors.

The executives at global investment firms fear that the restrictions will prevent them from profiting from their main competitive advantage over local Chinese fund managers—that is, their expertise in global markets.

“Whenever we do a roadshow, the rich Chinese investors would always ask us whether we could help them invest in global markets, because this is what we are good at,” said the sales representative with the second firm. “Why would they need us foreigners, rather than a local fund manager, when it comes to buying or selling A-shares?” she added, referring to domestically traded Chinese stocks.

Chinese banks, brokerages, insurers, trust companies and mutual funds, including some of their joint ventures with foreign firms, are able to offer products that invest abroad via the Qualified Domestic Institutional Investors program, a special channel for outbound investment launched in 2006. Source: The Wall Street Journal