0576pwc cp china2 · china’s capital market. by the end of 2000, china had 10 fund management...

Introductionto the Investment Management Industry in China

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As the dynamics of the market and competitive environment for the financial services sector increase in their complexity, being able to identify and adapt to the new challenges will determine the industry’s dominant players.

With the further globalisation and convergence of the industry, the increasing pressures on cost control and consistent investmentreturns and the increasing sophistication of investors, investmentmanagers are having to change the way they operate.

To assist financial services organisations, investors and other partieswho are exposed to funds and other types of investments,PricewaterhouseCoopers global team of investment managementindustry experts has produced this profile to provide general,illustrative guidance only. We have focused on highlighting the extent of the industry development in key locations around the world, together with the nature and scope of its regulation.While all reasonable care has been taken in preparing this guide,there is no substitute for regulations. Should readers encounterparticular problems or require further information, we encourageyou to seek professional advice or to contact one of the members of our global investment management network listed at the end of this publication.

Simon Jeffreys

Global investment management leader

Table of Contents

Introduction 1

Legislative and Regulatory Environment 3

Taxation 5

Tables 6Fund management companies market share 6Custodian banks market share 6Closed-end Funds Overview 7Open-end Funds Overview 8

PricewaterhouseCoopers investment management 9contacts in China

Our network of investment management specialists 10

The China investment fundmanagement market is set toexpand dramatically over thenext decade. Following China’saccession to WTO in December 2001, throughforming joint venture fundmanagement companies withChinese partners.

The Chinese Governmentlaunched the investment fundindustry in 1998, as part of itsreform of the financial servicessector and with the aim offacilitating the development ofChina’s capital market. By theend of 2000, China had 10 fundmanagement companies whichwere operating 34 closed-endfunds with a market value ofUS$ 10 billion, which is lessthan 2% of the combinedmarket capitalization of China’stwo stock exchanges.

Both the industry and theGovernment expected that thefund management market wouldcontinue to expand rapidly in2001, but that did not happen.By the end of 2001, China had14 fund management companiesoperating 48 closed-end fundsand 3 open-end funds with atotal asset under management ofUS$ 9.8 billion. While China’sfirst 3 open-end funds launchedwith a total of US$ 1.4 billion,the assets managed by theclosed-end funds shrank 16%

due to large-scale dividenddistribution and poor marketperformance.

The decline in the marketreflected caution not only on thepart of the regulator (the ChinaSecurities RegulatoryCommission), but also investors.A number of scandals damagedconfidence in the fledglingindustry at a time when therewere increasing doubts aboutthe performance of many of thecompanies listed on the twostock exchanges.

The prospects for the renewedrapid expansion of the industryare good. Regulation of theindustry is being tightened, fundmanagement companies arebeing strengthened (often withthe assistance of global fundmanagers), listed companies arebeing restructured and reformedand more dynamic ones arecoming to market.

Confidence in the industry’sgrowth potential is reflected inthe pressure from outsiders toobtain permission to establishnew fund managementcompanies. In addition, CSRChas announced its plan toabolish the quota restriction onthe approval of theestablishment of fundmanagement companies, whichwill speed up the marketexpansion. Currently it is

Introduction

INTRODUCTION TO THE INVESTMENT MANAGEMENT INDUSTRY IN CHINA

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estimated that more than 20 new fund managementcompanies will be set up in2002. Additionally, over 100 companies had filed theirapplication with CSRC and canpotentially establish businessafter 2003.

As a result of China’s economicreforms the pool of funds thatcould be attracted to investmentfunds is already substantial andcontinues to increase. Althoughmany people gamble on theChinese stock markets, mostChinese people remain verycautious about the placement of their hard-earned savings.Currently, individual Chinese are holding a total of some RMB 800 billion (around USD 96.6 billion, with exchangerate of 1USD = 8.3 RMB) in lowinterest rate bank accounts. Thishuge pool of funds is a majortarget for fund managers. Therewill also be a substantial inflowof funds from the rapidlygrowing insurance industry andstate-run pension funds.

Under the terms of China’saccession to the WTO foreignfund managers initially will beallowed to have a 33% stake ina joint venture fundmanagement companies, which

can be increased to 49% threeyears thereafter. Many leadinginternational fund managershave already signed MOUs withChinese fund managementcompanies and are providingthem with training and technicalsupport. Once CSRC haspublished the regulations onjoint ventures (an exposure drafthad been circulated inDecember 2001 for comments),there will be a spate ofapplications for joint ventures.Establishing mutually acceptableterms that will enable a jointventure to operate effectivelywill require much knowledge ofChina and skilful negotiation.

Because the growth ofinvestment funds will be closelytied to the overall developmentof China’s stock market it isdifficult to estimate the growthof the investment fund industryover the next decade. Within the industry it is widelyexpected that the average rate of growth over the next decadewill be between 50% and 75% a year. Such a rate of growthwould result in the industryhaving between $565 billionand $2,640 billion undermanagement by the end of 2011.

The National People’s Congressand its standing committee areempowered to exerciselegislative power in China andthe State Council is alsoauthorized by the Congress toadopt administrative regulationsand measures in accordancewith the Constitution and itsstatutes. The People’s Courts arethe judicial organs of the stateand the judiciary is able toexercise independent power inaccordance with the law. TheSupreme Court is the highest inthe land and is responsible tothe National People’s Congressand its standing committee.

In 1993 and 1999 respectively,the National People’s Congressapproved the Company Law andthe Securities Law, whichbecome the fundamentalstatutory rules governing thecapital markets in the country.However, the legislation specificfor the investment managementindustry seems to fall behind thedevelopment of the industry. InApril 2001, President JiangZemin signed the Trust Law,which will provide legal bindingstatus for the asset managementbusiness in the form of trusts,when it becomes effective fromOctober 2001. However,Investment Fund Law, the Biblefor the industry could hardly beironed out before the end of2001, although it was reportedthat the sixth draft had beensubmitted to the National

People’s Congress for furtherrounds of debate.

As a ministry level governmentagency directly under the StateCouncil, the CSRC acts as thesole regulator governing thesecurities activities and itsrelevant participants throughoutthe country.

The CSRC issued the InvestmentFund Measure in late 1997,providing the statutoryfundaments for the investmentmanagement industry in China.This rule was not changed until2001, when the CSRC issued asupplementary regulation toallow any registered companywith a good credit rating toparticipate in the industry. As amatter of fact, at least one of thefour newly founded fundmanage companies wasestablished by a non-financialservices corporation.

The 1997 Investment Measurealso set restrictions on theinvestment portfolios of funds,according to which no less than80 percent of fund total assetsshall be invested in equity anddebt securities and no more than10 percent of fund net assetsshall be invested in a listedstock. In order to maintainliquidity, funds are required tohold treasury bonds in theamount of no less than 20 percentof their total net assets. The Measure further preventsfund management companies


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Legislative and RegulatoryEnvironment

from holding controllinginterests in listed companies bylimited the combined totalshareholding percentage of onestock to 10 percent for all fundsunder the company’smanagement. Furthermore,funds are prohibited frominvesting in other funds andhaving real estates exposures.Commercial banks, especiallycustodian banks are not allowedto invest in funds while fundmanagement companies aregenerally not allowed to involvein business other than fundmanagement and treasury bondinvestment.

Since the implementation of the1997 Investment Fund Measure,5 supplementary implementationrules have been issued under the1997 Investment Fund Measure.The so-called implementationguidelines provide detailedguidance on relevant legaldocuments of funds and fundmanagement companies,covering fund contracts,prospectuses, custodianagreements, articles ofassociation of fund managementcompanies, informationdisclosure and financial reportingissues of investment funds.

In October 2000,the CSRCpromulgated a provisionalregulation specific to open-endfunds. According to the newregulation, approved fundmanagement companies can setup open-end funds with at leastRMB 200 million, orapproximately US$ 24 million,within an inception period of nomore than 3 months. Thenumber of shareholders shall beno less than 100 and theminimum net asset undermanagement shall be no lessthan RMB 50 million, or US$ 6 million, approximately.

In addition to the role asinvestment advisor, fundmanagement companies canretain the distribution andtransfer agent function in-house,or outsource them to otherinstitutions. And besides thetraditional asset custodyfunction, custodians are requiredto monitor the compliance ofunderlying funds. A fund canclaim to be temporarily closed ifnet redemption of more than 10 percent of outstanding unitsoccurs. Funds do not need to beopen everyday as most open-end funds do in other countriessince the provisional regulationonly requires open-trade of fundunits at least once every week.

The CSRC has revealed newpolicies to promote the growthand development of the fundindustry, including setting up aself-regulatory organization. Thisorganization would continuallyseek to protect investors byimproving facets of the industrysuch as professional standards,information presentation anddisclosure, fund registration andtransparency of fund operations.

Regarding the huge“unregulated” gray market, theInvestment Fund Law currentlyunder draft is designed to givelegal status to the “unregulated”funds by setting out statutoryguidelines for the regulator andmarket players to follow.According to the law, thedefinition of a fund would bemore than the current publiclyoffered ones solely invested inlisted securities. New productswill be introduced, includingventure capital and industrydevelopment funds mainlydistributed through privateplacement.


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Taxation

Ministry of Finance and the StateTax Bureau promulgated oneregulation that providesguidance on various taxationissues of investment funds inMarch 1998, according to whichfunds and fund investors aregenerally subject to three kind oftax and surcharges, includingbusiness tax, stamp duty andincome tax, which are muchmore favorable than normalsecurities investment.

Insurance companies, fundmanagement companies andcustodian banks are all subjectto the same business tax rate asall other financial institutions(i.e. 6% in 2002 and 5% in 2003and forward). Funds are allowedto be exempted from businesstax on realized gain on securitiestrading until the end of 2003.

In addition, funds are subject tostamp duty at 0.2 percent of thetrading amount for eachtransaction executed in 2001.

Funds are not subject to incometax on investment income andrealized gain since this tax isdeemed to eventually passthrough to investors. The 1998Regulation further allowsindividual investors exemptedfrom income tax on the realizedgain of fund shares as a specialincentive. It is worth mentioning

that income tax was alsoexempted for realized gains onsecurities trading at present.However, institutional investorsare liable for income tax onrealized gain from fund tradingas a normal source of taxableincome.

Stock dividends, interest frombank deposits and corporatedebentures are taxable forincome tax purpose and aregenerally withheld at the source.Hence, investors are not liablefor income tax on thesecomponents of dividend incomedistributed by funds. Othercomponents of fund distribution,such as interest from treasurybonds and realized gain onsecurities trading are not taxableas well since these incomes aretax-exempt at the source.

Fund management companiesand custodian banks are liablefor business tax on theirmanagement fee and custodyfee. After adding other sources of income and subtractingvarious deductible expenses, the adjusted net income becometaxable income for income taxpurpose. The income tax rate forfund management companies is 33 percent, however it wasreduced to 15 percent forcompanies currently registered in Shenzhen.


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Tables

Amount in RMB, GBP 1 = RMB 12.04 (30/09/01)

Company Name Registered Capital Establishment AUM @30/09/01 Percentage Number of Funds

(‘000) Date (100 Million) Under Management

Boshi 100 07/07/1998 79 11% 5

Dacheng 100 07/04/1999 74 10% 5

Nanfang 100 03/03/1998 65 9% 4

Guotai 110 03/03/1998 65 9% 4

Huaan 150 26/05/1998 114 15% 5

Changshen 80 26/03/1999 69 9% 4

Huaxia 138 06/04/1998 71 10% 5

Fullgoal 100 07/04/1999 60 8% 4

Penghua 80 16/12/1998 58 8% 4

Harvest 60 25/03/1999 20 3% 1

Efund 120 24/03/2001 24 3% 3

YinHua 100 24/05/2001 24 3% 1

Rongtong 125 08/05/2001 22 3% 2

BaoYing 100 12/02/2001 0 0% 0

Total 746 100% 47

Source: CSRC

Fund management companies market share

Source: CSRC

Custodian banks market share

Amount in RMB, GBP 1 = RMB 12.04 (30/09/01)

Bank Name Asset Under Percentage Number of

Custody Funds

@30/09/01 Under

(100 Million) Custody

Industrial and Commercial 209 28% 15Bank of China

Agriculture Bank of China 163 22% 10

China Construction Bank 148 20% 9

Bank of Communication 164 22% 9

Bank of China 62 8% 4

Total 746 100% 47


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(30/09/01)

Fund Name Inception Date Listed Date Listed Place Units @30/09/01 Manager

(100 million)

Kai Yuan 27/03/98 07/04/98 Shenzhen 20 Nanfang

Jin Tai 27/03/98 07/04/98 Shanghai 20 Guotai

Xing Hua 23/04/98 08/05/98 Shanghai 20 Huaxia

An Xin 22/06/98 26/06/98 Shanghai 20 Huaan

Yu Yang 25/07/98 30/07/98 Shanghai 20 Boshi

Pu Hui 06/01/99 27/01/99 Shenzhen 20 Penghua

Tai He 08/04/99 20/04/99 Shanghai 20 Harvest

Tong Yi 08/04/99 21/04/99 Shenzhen 20 Changsheng

Jing Hong 05/05/99 18/05/99 Shenzhen 20 Dacheng

Han Sheng 10/05/99 18/05/99 Shanghai 20 Fullgoal

An Shun 15/06/99 15/06/99 Shanghai 30 Huaan

Yu Long 15/06/99 24/06/99 Shenzhen 30 Boshi

Xing He 14/07/99 30/07/99 Shanghai 30 Huaxia

Pu Feng 14/07/99 30/07/99 Shenzhen 30 Penghua

Tian Yuan 26/08/99 20/09/99 Shenzhen 30 Nanfang

Jing Bo 01/06/92 22/10/99 Shenzhen 10 Dacheng

Jing Yang 01/05/92 22/10/99 Shanghai 10 Dacheng

Yu Yuan 01/06/92 28/10/99 Shanghai 15 Boshi

Tong Sheng 05/11/99 26/11/99 Shenzhen 30 Changsheng

Jin Xing 21/10/99 26/11/99 Shanghai 30 Guotai

Jing Fu 30/12/99 10/01/00 Shenzhen 30 Dacheng

Han Xin 30/12/99 10/01/00 Shanghai 30 Fullgoal

Yu Hua 31/12/99 24/02/00 Shenzhen 5 Boshi

Tong Zhi 13/03/92 15/05/00 Shenzhen 5 Changsheng

Yu Ze 31/05/96 17/05/00 Shenzhen 5 Boshi

Jin Sheng 01/12/94 30/06/00 Shenzhen 5 Guotai

Jin Yuan 28/05/92 11/07/00 Shanghai 5 Nanfang

Xing Ke 31/05/92 18/07/00 Shenzhen 5 Huaxia

Jin Ding 31/05/92 04/08/00 Shanghai 5 Guotai

Han Ding 01/01/94 17/08/00 Shanghai 5 Fullgoal

Xing An 29/12/92 20/09/00 Shenzhen 5 Huaxia

Closed-end Funds Overview

Tables cont.


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(30/09/01)


(100 million)

Han Bo 30/05/92 17/10/00 Shanghai 5 Fullgoal

Long Yuan 29/12/99 18/10/00 Shenzhen 5 Nanfang

An Jiu 31/08/92 * * 2 Huaan

Ke Xun 12/01/93 * * 8 efund

Ke Hui 14/12/93 * * 8 efund

Ke Xiang 14/12/93 * * 8 efund

Tong Gan 29/08/01 * * 20 Rongtong

Xin Yie 03/09/01 * * 5 Huaxia

Tong De 04/09/01 * * 5 Changsheng

An Rui 29/04/92 * * 2.1 Huaan

Tian Hua 12/07/99 * * 25 Yinhua

Tong Bao 31/05/92 * * 2.1 Rongtong

Pu Hua 29/05/92 * * 2.3 Penghua

Pu Run 09/05/92 * * 2.03 Penghua

Jing Yie 01/04/92 * * 3.73 Dacheng

Total 703.26

* Not listed as of September 30, 2001Source: CSRC

(30/09/01)


(100 million)

Hua An Chuang Xin 22/09/01 * * 50 Huaan

* Not listed as of September 30, 2001Source: CSRC

Open-end Funds Overview

Alex WongTelephone +86 21 6386 3388 Ext 3171Facsimile +86 21 6386 [email protected]


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PricewaterhouseCoopersinvestment managementcontacts in China


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Our network of investment managementspecialists

PricewaterhouseCoopers (www.pwcglobal.com), the world’slargest professional services organisation, helps its clients buildvalue, manage risk and improve their performance.

As a leading provider of professional services to investment managers,PricewaterhouseCoopers has a multi-disciplinary team of proven professionalscomprised of business advisors and consultants dedicated to the industry andspanning over 68 countries worldwide. This team includes over 500 partners,supported by a network of professionals, whose specialist knowledge andexperience enable us to provide our clients with insights into marketplacedevelopments and global opportunities. PricewaterhouseCoopers offers industry-focused solutions and strong implementation capability, providing a globally co-ordinated approach to the investment management industry’sbusiness needs.

To find out more about our services, contact your usual PricewaterhouseCoopersrepresentative or one of the following Investment Management Leaders:

Global Simon Jeffreys: +44 207 212 4786

Asia Pacific Robert Grome: +852 2289 1133

Europe, Middle East and AfricaDidier Mouget: +352 49 48 48 2510

North AmericaLloyd Voneiff: +1 312 298 4815

Global Corporate Finance & RecoveryRichard Thompson: +44 207 213 1185

Global Management Consulting ServicesRobert Gould: +1 646 471 3908

Global Risk Management ServicesThomas Barrett: +1 617 478 5363

Global Tax ServicesDavid Newton: +44 207 804 2039

Argentina Santiago Mignone +54 11 48 91 45 72Australia David Prothero +61 2 8266 2916Austria Christian Kraetschmer +43 1 313 77 500Bahamas Clifford Johnson +1 242 302 53 07Barbados Michael Bynoe +1 246 431 9740Belgium Emmanuèle Attout +32 2 710 40 06Bermuda George Holmes +1 441 299 7109Brazil João Manoel dos Santos +55 11 367 437 87British Virgin Islands Meade Malone +1 284 494 4388Canada Barry Myers +1 416 869 2441Cayman Islands Noel Reilly +1 345 914 8600Central & Eastern Dariusz Nowak +352 49 48 48 25 30Europe CoordinatorChannel Islands

• Guernsey Michael Bane +44 1481 719 314• Jersey Brendan McMahon +44 1534 83 82 34

Chile Alfredo Rossi +56 2 94 00 064China Alex Wong +86 21 63 86 31 71Cyprus Costas Mavrocordatos +357 22 55 52 02Czech Republic François Mattelaer +420 2 51 15 20 15Denmark Mikael Sørensen +45 39 45 91 02Estonia Urmas Kaarlep +372 614 1 801Finland Juha Wahlroos +358 9 22 80 14 37France Jacques Lévi +33 1 56 57 80 46Germany Markus Burghardt +49 69 9585 22 40Gibraltar Colin Vaughan +350 73520Greece Lorraine Scaramanga +30 1 68 74 710Hong Kong Robert Grome +852 22 89 11 33Hungary Mike Birch +36 1 461 91 83Iceland Hjalti Schiöth +354 550 53 37India Kersi Vachha +91 22 283 27 75Ireland, Republic of Marie O’Connor +353 1 66 26 308Isle of Man Mike Simpson +44 01624 689 689 Israel Joseph Fellus +972 3 795 4 780Italy Fabrizio Piva +390 2 77 85 241Japan Thomas Romeo +81 3 55 32 25 21


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Our network of investment management specialists cont.


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Korea Jae-Hyeong Joo +82 2 709 06 22Latvia Juris Lapshe +371 709 44 00Lithuania Cameron Greaves +370 2 392 300Luxembourg Marc Saluzzi +352 49 48 48 25 11Malaysia Mohammad Faiz Azmi +603 26 93 10 77Malta Joseph Camilleri +356 26 54 76 03Mauritius Jean-Paul de Chazal +230 207 1000Netherlands Sonja Barendregt-Roojers +31 10 4008 639New Zealand Paul Mersi +64 4 462 7000Norway Geir Julsvoll +47 23 16 05 40Philippines Blesilda Pestaño +63 2 459 3006Poland Brian O’Brien +48 22 523 44 85Portugal António Assis +351 213 319 7238Romania Joe Kerrane +40 1 202 8670Russia Richard Munn +7 095 967 6374Singapore Bin Hwee Quek +65 23 63 028Slovakia Paul Barnes +421 2 54 41 41 01South Africa Deon Viljoen +27 11 797 43 46South & Central Santiago Mignone +54 11 48 91 45 72America CoordinatorSpain Antonio Greño +34 91 568 46 36Sweden Sussanne Sundvall +46 8 555 332 73Switzerland Thomas Huber +41 1 630 24 36Taiwan James Huang +886 2 27 29 52 08Thailand Unakorn Phruithithada +66 2 344 11 34Ukraine Jorge Intriago +380 44 490 67 77United Kingdom Lynne Ed +44 207 212 55 25United States Lloyd Voneiff +1 312 298 4815

0576pwc cp china2 · china’s capital market. by the end of 2000, china had 10 fund management...

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