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Breakthrough Under QDLP/QFLP Pilot Programs - Shanghai Moves on Under Lockdown

2022.05.17 XIE, Qing (Natasha)、ZHANG, Chi、LUO, Danchen

Despite the temporary lockdown caused by the Covid-19 outbreak in Shanghai, the stock market, bond market, foreign exchange market and derivatives market in Shanghai opened as usual. During weeks of lockdown, Shanghai financial officers did not let up and continued to promote and advocate the development of cross-border asset management. With the support of the China Securities Regulation Commission (CSRC) and other financial authorities, Shanghai financial officers advanced the innovation of pilot programs for cross-border capital flow and landing in Shanghai of foreign asset management institutions. At the beginning of May, the Shanghai Municipal Financial Regulatory Bureau (SFRB) published an article on its website regarding the latest developments of the Qualified Domestic Limited Partner (QDLP) and the Qualified Foreign Limited Partnership (QFLP) pilot programs in Shanghai. Shanghai has always been at the frontier of the two-way opening-up of China’s capital markets.


1. Public Fund Managers are Allowed to Participate in the QDLP Pilot Program


Recently, the SFRB granted BlackRock China Fund Management Company a QDLP pilot qualification, making it the first wholly foreign-owned public fund management company (FMC) to participate in the QDLP pilot program.


China International Fund Management Co., Ltd. (CIFM) was the only FMC to obtain the QDLP pilot qualification in July 2015 and it issued QDLP products thereafter. Since then, foreign asset management institutions have mainly used their wholly foreign-owned private fund management subsidiary to participate in the QDLP pilot program, and no FMC has been approved for a QDLP pilot qualification except CIFM. Domestic and foreign-owned FMCs generally apply for a Qualified Domestic Institutional Investor (QDII) qualification to invest in overseas markets1


FMCs’ running of QDLP business does not conflict with their main business and could effectively supplement their QDII business and both QDII and QDLP quotas need to be approved by the State of Administration of Foreign Exchange (SAFE). However, since FMCs are under stringent regulations by the CSRC, an FMC needs to satisfy not only the requirements of the QDLP pilot program but must also be endorsed by the CSRC to participate in the QDLP pilot program, and in certain cases, may be required to meet QDII requirements before applying for a QDLP pilot qualification. 


This is the first instance whereby a newly established FMC without a QDII qualification, like BlackRock China Fund Management Company, was approved for the QDLP pilot qualification without obtaining the QDII qualification. Under the coordination of the SFRB, the CSRC supported BlackRock China Fund Management Company, as a newly established FMC, to apply for the QDLP pilot qualification, which undoubtedly sets a precedent for many foreign-owned FMCs to apply for the QDLP pilot qualification.


Compared with the QDII mechanism, the QDLP pilot program has a more simple and flexible application process and is more likely to become an experimental field for innovative businesses (e.g., certain alternative underlying investments), which could effectively supplement the QDII mechanism. In terms of the investment scope, an FMC is likely allowed to directly invest in overseas securities with a QDLP pilot qualification, which helps cultivate onshore fund managers’ capability to directly manage overseas investments. Following BlackRock China Fund Management Company, Fil Asia Holdings Pte. Limited and Neuberger Berman Investment Advisers LLC have been approved to establish wholly foreign-owned FMCs, and several other foreign institutions including Van Eck, Alliance Bernstein and Schroder have already applied to the CSRC for an FMC license. We expect that more wholly foreign-owned FMCs and even domestic FMCs will further investigate the QDLP pilot program. 


2. WFOE PFMs May Simultaneously Conduct QDLP Businesses


The SFRB has approved AZ Investment Management, as a wholly foreign owned enterprise securities-type private fund manager (WFOE PFM), to conduct QDLP business, meaning that it is permitted for the first time in China to use the same entity to conduct both securities-type private fund management business and QDLP business. With the support of the CSRC, Shanghai, as the city with the largest number of WFOE PFMs, has approved for the first time that QDLP business and WFOE PFM business can be carried out by the same entity without the need to establish two entities. This saves the domestic managers’ costs and resources for participating in the QDLP pilot program, improves efficiency, and is conducive to attracting leading foreign asset management institutions to Shanghai. Theoretically, foreign asset management institutions can firstly launch a WFOE PFM business and then apply for the QDLP pilot qualification using the same entity, and vice versa.


At present, such an exception is only applicable to foreign-invested securities-type private fund managers (WFOE PFM), i.e., only a foreign-invested securities-type (not a PE/VC type) PFM may apply for a QDLP pilot qualification. It remains uncertain whether there is any restriction to the underlying assets that the QDLP is allowed to invest in, i.e., whether the underlying assets are limited to overseas stocks and bonds traded in the secondary markets. We hope that QDLP funds managed by a WFOE PFM will be allowed to invest in a diversified universe of underlying assets, for example, assets in the overseas primary markets or alternative assets, in addition to traditional secondary market assets like overseas stocks and bonds. In this regard, we believe that the Shanghai government will continue to promote innovation and pilot programs in more fields with the support of the CSRC.


3. Significant Increase in the Pilot Program Quota Granted to Single QDLP Manager


The Shanghai government shows a pragmatic and flexible attitude in the approval of QDLP pilot program quotas to a single QDLP manager. Though the amount approved in the initial stage may not be very high (i.e., USD 50 million), Shanghai allows applicants to apply repeatedly for additional quotas. Recently, applications for additional quotas by several institutions have been approved by the SFRB. For example, Credit Suisse Investment, PIMCO Investment and UBP Investment, have been granted additional quotas of USD 200 million, USD 200 million and USD 100 million respectively, after which the total amount reached USD 400 million, USD 400 million and USD 150 million respectively. As long as QDLP funds can be distributed smoothly in the local market, the pilot program quota available to a single QDLP manager can effectively satisfy its needs for outbound investments, and the onshore revenue may cover the setup and human costs onshore. 


4. QFLP Managers Are Allowed to Invest in S Funds


The SFRB has approved Hamilton Lane Capital to launch a Secondary Fund (“S Fund”) via the QFLP pilot qualification, which is the first case in Shanghai of a QFLP investing in an S Fund. Hamilton Lane Capital is a private equity investment management company founded in U.S.. It has launched five S Funds with a total size of nearly USD 8 billion and is one of the most active foreign S Fund managers. The S Fund, also known as the private equity secondary market fund, is a fund that specializes in acquiring alternative fund units, portfolios or capital commitments from LPs. It should be noted that the CSRC has approved a pilot program for the transfer of PE/VC fund units in the regional equity market of Shanghai, and S Funds can be traded on the Shanghai Equity Exchange. 


The SFRB has also approved SIG China and Xinjing Investment for additional QFLP pilot program quotas of USD 70 million and USD 500 million respectively, after which the total quotas have respectively reached USD 700 million and USD 1 billion. The increase in the QFLP pilot program quota manifests the long-term commitment of US dollar funds to invest in the Chinese market even under the current situation where capital raising is difficult. 


5. Efficiency of Approvals


The lockdown in Shanghai did not slow the pace of approvals for the QFLP and QDLP pilot programs. The SFRB, together with the Shanghai Municipal Commission of Commerce, the Shanghai Administration for Market Regulation, the Foreign Exchange Administration Shanghai Bureau and other relevant authorities, have approved four institutions for QFLP pilot qualifications and two institutions for QDLP pilot qualifications by means of online interviews and assessments, reflecting the Shanghai governments’ strong support for cross-border asset management business.


After the epidemic passes, Shanghai will prosper as usual. We strongly believe in the city’s future: Shanghai will continue to be open to the world and become one of the most developed financial centers internationally.



1. According to the official website of the SAFE, up to April 30, 2022, the accumulative QDII investment quotas granted to FMCs have amounted to USD 70.06 billion. See the “List of Approved Investment Quotas for Qualified Domestic Institutional Investors (QDII) (up to April 30, 2022)” released by the SAFE on April 29, 2022 (https://www.safe.gov.cn/safe/2018/0425/16849.html).



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