China: China Wealth Management Opportunities – Trust and Investment Companies
(the “ITIC Regulations”) issued by the People’s Bank of China (“PBOC”) on 5 June 2002, an ITIC may be approved by the PBOC to engage in a broad range of Renminbi and/or foreign currency business, a key one being to operate and manage funds or property (which may be movable or immovable property) entrusted to it. In effect, this enables a private fund industry to be operated by ITICs. Under the
(“Trust Fund Management Regulations”) issued by PBOC on 26 June 2002, an ITIC can manage a commingled trust fund from not more than 200 ‘investors’ where each ‘investor’ entrusts not less than RMB50,000 (approximately USD6,200). There are no specific requirements or restrictions on the permitted investments of a trust portfolio. ITICs currently operate pooled trust portfolios that invest in listed equities, bonds, securities investment funds managed by domestic securities investment fund management companies, Chinese real estate and infrastructure.
Unlike trusts under common law, a “trust” structure or arrangement under PRC law operates more as a contractual arrangement. Although an ITIC may manage a commingled trust fund from up to 200 ‘investors’, it may not engage in any advertisement when conducting trust management business. The CBRC has indicated that the trust fund business of ITICs is designed to be promoted by way of ‘private placement’ and not ‘public offering’, and should be targeted at ‘investors’ with a reasonable amount of risk knowledge and risk capacity.
An ITIC may also act as the promoter and key Chinese shareholder of a PRC securities investment fund management company which engages in retail investment fund business. Further, under the PRC Regulations on Enterprise Annuities, ITICs may apply to manage the investments of enterprise annuities (private corporate pension funds) subject to the approval of the Ministry of Labour and Social Security.
Other possible scope of business of ITICs includes providing intermediary services such as consulting on corporate restructuring, mergers or acquisitions, project finance or corporate finance, accepting underwriting business for Treasury Bonds, bonds of Chinese policy banks or corporate bonds approved by the relevant departments of the State Council, and conducting custodian business (but not for retail securities investment funds, which role can only be performed by Chinese commercial banks under current laws and regulations).
While references are made to the PBOC in the ITIC Regulations, ITICs are in practice regulated by the CBRC. According to information obtained from the CBRC, there were about 60 ITICs in China established in different regional or provincial cities as at December 2005.
Under the ITIC Regulations, an ITIC is required to have a registered capital of not less than RMB300 million (approximately USD37 million), and an ITIC that engages in foreign currency business must have registered capital not less than the equivalent of USD15 million (approximately RMB121 million) of foreign currency, or such other amount as the CBRC may determine.
There has to-date not been any announced or known foreign investment in ITICs. We understand that the CBRC is prepared to consider applications from foreign investors to invest in ITICs, and may possibly accept foreign investors taking up a significant stake in ITICs for strategic investment purpose. Interestingly, as ITICs are not banks, these type of companies are technically not subject to the 20% foreign investment limit applicable to banks under China’s WTO commitment, and are also not covered by any other China’s WTO commitment.
This is a follow-up to an earlier article: “China Wealth Management Opportunities – Setting Up a Representative Office“ published in our June 2005 newsletter (available on our website at www.deacons.com.hk/eng/knowledge/knowledge_227.htm).
For more information about the landscape and players in the China wealth management industry, you may visit our website: www.deacons.com.hk.