The new Beijing QDLP program

As published, a number of world-renowned asset managers are assessing new capital raising opportunities with Beijing Local Financial Supervision and Administration (“Beijing SFO”). Beijing SFO has internally released a high-level QDLP rule and touched base with more than a dozen global asset managers who have expressed interest in participating in the Beijing QDLP program.

First introduced in Shanghai in 2012 and subsequently adopted by a few municipal governments, various local QDLP pilot programs have quickly become one of the most important channels for global asset management products to gain access to high net worth individual and institutional investors in China. Among those local programs, the Shanghai QDLP, known for its foreign manager friendly regulatory environments and experienced local officials, remains so far, the most popular one. For more information about overview and history of the Shanghai QDLP program, please refer to our article PRC marketing opportunities for overseas funds QDLP Quotas increased to USD 5 Billion.

The Beijing program, upon its release, is anticipated to become a major competitor to the Shanghai program. Based on our understanding of this programme and discussion with Beijing officials, we have highlighted some of its competitive advantages below:

Higher Quota

The QDLP programs are quota-based, which means all QDLP programs are restricted by the limited foreign currency quota issued by the SAFE. To ensure full utilisation of such quota, for each asset manager applicant, the local authority will be inclined to approve a smaller initial quota (usually US$50m) and require such an applicant to apply for “top-up” once the initial quota has been used up. Such top-up is subject to remaining quota of the entire program and might not always be available. For instance, before the Shanghai QDLP was revived in 2018, the program had been suspended for almost 2 years due to the concerns of capital outflow, resulting in the inability of asset managers to attract more investors or admit incremental subscriptions from existing investors during the suspension.

The Beijing program addresses this issue by providing a bigger initial quota to each applicant. Through the Beijing program applicants would be likely to receive an initial quota amounted to US$500m if the underlying products are alternative investment funds, and US$1000m if the underlying products are retail funds. The granting of a larger quota per applicant might suggest a smaller total number of applicants in comparison with that of the Shanghai program.

Expedited application process

As a pilot program, the administration process of an application requires multi-department collaboration. Local departments, including the financial bureau, administration of foreign exchange, administration for market regulation, will all need to be aligned before the official approval can be granted. Consequently, one application may take several months to process.

That said, the Beijing government can expedite the whole process by taking advantage of its “quick response network”. It has a successful percent where an applicant was approved after eight business days since it applied officially.

However, given the general nature of the current Beijing rule, the market has expressed concerns over how the program would operate in practice, including whether the preferential treatment given under the Shanghai program would similarly be given under the Beijing program. For instance:

Synergizing QDLP and PFM practice

Similar to the Shanghai program, Beijing QDLP requires the applicants to set-up a local Beijing based QDLP manager. The Shanghai program further offers global asset managers who also have a QDLP manager to synergize the QDLP and PFM practice, by allowing:

• Dual hatting arrangements for employees, other than chief compliance officer, to take place between the QDLP manager and PFM manager; and
• The QDLP manager and PFM manager may share the same address for the purpose of business and AMAC registration.

Additionally, if the QDLP and PFM managers were set-up as parent and subsidiary companies rather than two sister companies, then (i) the PFM and QDLP can dual hat the role of the chief compliance officer and (ii) the capital contributed for the purpose of establishing the QDLP manager, will be counted towards the capital requirements of the PFM manager, resulting in a more flexible capitalization structure. Please see below diagram for illustration.

The Beijing QDLP rule, however, hasn’t specified whether a similar arrangement will be offered. Beijing SFO has expressed the intention to coordinate with AMAC to offer a similar relief, but the detailed approach has yet to be decided on.

Incentive Rules (RHQ rule)

The latest version of the Shanghai QDLP rule also provides a standard for the parent company of the QDLP manager to qualify as regional headquarter of a multinational corporation (RHQ) in Shanghai. Once qualified, the company will be offered certain entitlements such as financial support, tax benefits, as well as support for foreign currency exchanges and settlement, haring of expat employee etc.

In order to echo the Beijing government’s efforts to develop the Tongzhou district as Beijing’s new financial centre, we would expect that a set of rules intended to incentivise and attract financial institutions, including QDIIs and QDLPs, may be released and implemented in the near future.

What’s next?

Beijing authorities have been actively seeking to communicate with prospective applicants to understand their business needs and concerns and are working to draft and implement more detailed guidelines and rules to address such needs and concerns.

In light of the evolving situation as well as the limited total quota of the Beijing program, we would suggest the asset managers who are interested in participating in such a program to initiate prompt communication with the relevant Beijing authorities through suitable channels.