Accessing Investor Capital: Determine which investment program is suitable and what issues international companies must consider

Thursday, March 3, 2016 - 23:04

Chinese investors have accelerated their outbound investments in the global market. This can be seen from various headline stories appearing on global broadsheets involving Chinese investors making or participating in mega M&A projects. However, financial regulations, especially currency controls, remain a major obstacle for Chinese investor capital flowing out of China.  

Due to China’s currency controls, an international company wishing to tap into Chinese investor capital needs to go through one of a few authorized channels in order to have the Chinese investors’ renminbi (RMB) converted into a foreign currency, such as U.S. dollars, for investments outside of China. There are three major authorized channels or programs for this purpose: Qualified Domestic Limited Partnership (QDLP) or Qualified Domestic Investment Enterprise (QDIE) Program, Qualified Domestic Institutional Investor (QDII) Program, and Overseas Direct Investment (ODI) Program. 



QDLP and QDIE are pilot programs sponsored by the local governments of Shanghai, Qianhai and Tianjin to provide alternative channels for Chinese investors to invest in asset classes overseas, which are not otherwise permissible under the QDII regime (see the section “What is QDII”), including, including offshore hedge funds, private equity funds, venture funds, real estate funds and structured products. The programs sponsored by the Shanghai municipal government and the Tianjin municipal government are called QDLP, while the program initiated by the Qianhai government is called QDIE. 

Under these programs, an international manager would set up a wholly owned subsidiary (WFOE) in the relevant locality. It then acts as the general partner or manager/sponsor of local private investment funds funded by qualified Chinese investors. The WFOE is granted a certain foreign exchange quota with which RMB can be converted into U.S. dollars for investment in offshore funds or products.




Who Should Consider QDLP/QDIE? 

A major benefit of this program is to allow Chinese investors to invest in alternative asset classes, which would not typically be permissible under the QDII or ODI programs. Thus, fund managers focusing on alternative strategies should consider this program. The table “Basic QDLP/QDIE Rules” provides a glance at the key features of the Shanghai and Tianjin QDLP programs, as well as the Qianhai QDIE program. 


Key QDLP/QDIE Issues 

Given that all three programs require the establishment of a presence in the relevant locality, an international fund manager should consider the feasibility of setting up a subsidiary in Shanghai, Tianjin or Qianhai with the requisite capitalization, staffing and governance. In addition, a key to success under this program is the ability to market the manager’s offshore funds and products to Chinese investors. Thus, marketing restrictions, distribution partners and placement agents are also important issues to consider when applying to participate in any of the Shanghai, Tianjin or Qianhai programs. Finally, the WFOE and the funds established under these programs would be licensed as private fund managers and private funds by the Asset Management Association of China (AMAC) and subject to AMAC regulations. The entry into China’s private asset management industry will require ongoing compliance with Chinese asset management licensing rules. The compliance aspect should be considered as well.  


What Is QDII?

The QDII regime was established in 2006 to enable qualified Chinese financial institutions to invest in overseas securities. Under this regime, only Chinese financial institutions – such as banks, trust companies, securities firms, fund management companies and insurance companies – can be licensed as QDIIs and granted a foreign exchange quota to convert Chinese investors’ RMB into foreign currency to invest overseas.  


Who Should Consider QDII? 

The QDII regime is rather restrictive in terms of what securities are eligible. Typically, mutual funds and other regulated collective investment schemes are favored. Chinese QDIIs would issue an investment product to pool Chinese investor capital and the product will typically invest in a regulated offshore fund. Thus, international fund managers, especially those which may not want to set up a presence in China, can consider utilizing the QDII regime to access Chinese investors.  


Basic QDII Rules

The QDII regime takes a sectoral approach, with different financial regulators regulating the QDII participants under their respective jurisdiction. For example, China Banking Regulatory Commission (CBRC) is responsible for regulating banking QDII participants, including commercial banks and trust companies; China Securities Regulatory Commission (CSRC) is responsible for overseeing the overseas investment by securities QDII participants, including fund management companies and securities companies; and China Insurance Regulatory Commission (CIRC) is responsible for regulating insurance QDII participants, i.e. insurance companies. 

There is not a unified set of QDII rules applicable to all QDII participants. Each of the above three financial regulators has issued its own QDII rules for the QDII participants under their own jurisdiction. The table “Key Aspects of CIRC Rules” sets forth some of the significant features applicable to the insurance QDII participants that CIRC regulates.


Key QDII Issues

With the QDII regime, the licensed Chinese QDIIs are responsible for regulatory compliance. An international fund manager must make sure its Chinese QDII investors have the proper license and approvals, as well as internal controls in place to comply with Chinese rules. Additionally, an international company should analyze the applicable KYC/AML requirements for Chinese QDII investors.  


What is ODI?

ODI refers to outbound investment projects made directly by a Chinese enterprise in China or indirectly through an offshore structure (such as an offshore special purpose vehicle). Investment projects can be green-field investments, acquisitions, joint ventures, capital increase or capital injection into an overseas company. 


Who Should Consider ODI?

From an international company’s perspective, a recent structure has been developed to facilitate the tapping into of Chinese investor capital for overseas investment targets. The structure (aka the ODI structure) involves the following components: The international company sets up a WFOE in one of the free trade zones (FTZs), such as the Shanghai FTZ, Qianhai FTZ or Tianjin FTZ; the WFOE sponsors a private investment partnership in one of the FTZs whereby the WFOE acts as the general partner and Chinese investors are limited partners; and the WFOE, as the general partner, makes the necessary filings (or obtains the necessary approvals) with the relevant regulators for the Chinese partnership to invest into the overseas targets. 

Hence, international companies that are interested in raising capital from Chinese investors for already identified, specific, direct investments could consider this ODI channel and, more specifically, the new ODI structure. Such investments can be real estate development projects, direct private equity investments or venture capital investments. 


Basic ODI Rules

The ODI structure is subject to filing/approval from the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE). These regulators have recently relaxed their previously approval-heavy and time-consuming regulatory regimes. 

The table “NRDC” provides a glance at that agency’s regulatory filing/approval requirements.






Only ODI transactions in sensitive countries, regions and industries will be subject to approval from central MOFCOM. All other ODI transactions will only be subject to a filing requirement, irrespective of the investment amount. The approval authority is central MOFCOM. The provincial level offices of MOFCOM may only conduct a preliminary review of ODI transactions as delegated by central MOFCOM, which retains the ultimate approval authority.



The formalities with SAFE in respect to ODI transactions are more administrative and procedural in nature. In 2015, SAFE liberalized its registration procures in relation to ODI transactions For example, delegating certain authority it previously exercised to qualified commercial banks. However, recent large capital outflows from China have caused SAFE to take back some of the previously delegated authority so SAFE can apply tighter scrutiny on proposed outbound investments. 


Key ODI Issues 

The key issues to consider include the ability to set up a WFOE in China with appropriate governance, staffing, and capitalization, obtaining the right license for the WFOE, and choosing the right location based on the ease and speed of establishment process andregulatory filing/approval procedure.  


All these programs show a trend of more openness and flexibility in China’s outbound investment policies. An international company should consider its needs and objectives when choosing a program that is most suitable.



Ying WhitePartner at Clifford Chance LLP’s Beijing office, she heads the firm’s China investment funds and investment management practice.