China allows foreign institutions to launch onshore private funds

SHANGHAI (Reuters) - China has opened the way for foreign asset managers to begin launching private investment funds in the country through local subsidiaries, by publishing long-awaited registration rules for such investments.

The step removes a key technical hurdle to foreign entry 1-1/2 years after China agreed to deregulate its private fund market as part of commitments made during the U.S.-China 8th Strategic and Economic Dialogue in June, 2015.

The rules were published by the Asset Management Association of China (AMAC) on its website late on Thursday.

“The rules have clarified several issues that have previously puzzled foreign fund managers, and now, China’s private fund industry is fully open, on a technical level,” said Ivan Shi, head of data analytics at Shanghai-based fund consultancy Z-Ben Advisors.

However, foreign asset managers will only be permitted to trade via China-based systems and as long as their onshore and offshore businesses are separate.

In the mutual fund space, foreigners will still need to operate through minority-owned ventures with Chinese partners.

The new rules came two days after Fidelity International became the first global asset manager allowed to launch investment products in China through a wholly-owned local subsidiary, after registering with AMAC.

At least eight other foreign asset managers, including Aberdeen Asset Management (ADN.L), Bridgewater Associates, and Vanguard have also set up wholly foreign-owned enterprise (WFOE) in China, but have yet to register with AMAC in order to launch onshore products.

In addition to detailing the registration process for foreign asset managers, the AMAC rules also made clear that applicants must not take trading instructions from offshore systems or institutions.

Instead, trading terminals should be installed onshore, transactions should be transparent and easy to trace, while trading data should be comprehensive and accessible, according to the rules.

In addition, foreign institutions should separate their onshore and offshore businesses in an appropriate manner, and should take measures to avoid conflict of interest.

Editing by Kim Coghill