Financial Services Focus Group Quarterly Update – Q1 2017

Published on 2017-04-21

China’s 1Q17 GDP grew at 6.9%, beating market expectations. The strong first quarter was attributed to export growth, the booming real estate market and an increase in infrastructure investment, leading to robust industrial production.

China Economic Highlights

China’s 1Q17 GDP grew at 6.9%, beating market expectations.  The strong first quarter was attributed to export growth, the booming real estate market and an increase in infrastructure investment, leading to robust industrial production. 

In March, in his Work Report Chinese Premier Li Keqiang targeted 2017 GDP growth at around 6.5%, CPI at around 3% and M2 growth at around 12%.  The Chinese Government has set moderate expectations for the economy’s performance in 2017.

China’s foreign exchange reserves remained above US$3 trillion through the end of March.  The State Administration of Foreign Exchange commented that pressure on capital outflows has slightly eased in the first quarter and forex reserves are expected to further stabilise.

China-HK Bond Connect Scheme

Following on from the China-Hong Kong Stock Connect scheme, it was announced that the connection between Mainland China and Hong Kong bond markets will start this year, as confirmed by Premier Li at a press conference on closing of the 5th session of the 12th National People's Congress in March 2017.

Currently, foreign investors can invest in the Mainland bond market through the qualified foreign institutional investor (QFII) or renminbi qualified foreign institutional investor (RQFII) schemes.  In addition, foreign investors can also access the Mainland bond market through bond funds sold under the China-Hong Kong mutual recognition of funds (MRF) scheme.  Last year, the People’s Bank of China also opened the China interbank bond market to foreign institutional investors.  With the upcoming introduction of the Hong Kong-China Bond Connect, foreign investors will have another channel opened to direct cross-border access to onshore bond markets.  The exact date for the Bond Connect launch has not been finalized.

New VAT rules affecting Asset & Wealth Managers

On December 21 2016, the PRC Finance Ministry and State Administration of Taxation jointly issued a policy statement that asset managers (including fund houses, trustees and banks) should be responsible for paying 6% VAT on the income generated by the asset and wealth management products which they manage.  The asset management sector immediately expressed deep concern regarding this new policy on grounds that asset managers should not be liable for VAT on returns ultimately benefiting investors.  Later, a new tax notice was issued January 6 2017 delaying the implementation of the new VAT Policy to July 1 2017.  This new notice offers additional time for asset managers to prepare VAT payments on their products although it does not alleviate industry concerns over double taxation.  Meanwhile, the Asset Management Association of China has urged the Finance Ministry and State Administration of Taxation to provide clarity in regard to this new VAT rule and the avoidance of double taxation.

1st Wholly Foreign-invested PFM Established

At the beginning of 2017, we have seen the first wholly foreign-invested private securities fund manager (WFOE PFM) FIL Investment Manager (Shanghai) Ltd complete its business registration in Shanghai.  This is a Chinese fund management subsidiary wholly owned by UK’s Fidelity Group.  Meanwhile, the Asset Management Association of China also issued “Illustrative Guidance for the Registration and Filing of WFOE and Joint Venture Private Security Fund Managers” on its website.  The Illustrative Guidance sets out detailed guidelines through illustration of the registration and filing procedures of a WFOE PFM.

It is expected that a pipeline of qualified international asset managers will apply for WFOE PFM registration in China going forwards.