RMB funds’ investment in red chip structures

Investment in red chip structures by domestic Renminbi funds is, on the one hand, affected by state policies on overseas direct investment (ODI) and, on the other hand, affected by the industry regulations promulgated by the Asset Management Association of China (AMAC) because the investing entity is a fund. After senior officials of the National Development and Reform Commission, the Ministry of Commerce, the People’s Bank of China and the State Administration of Foreign Exchange responded, in December 2016, to media’s questions on strengthening the regulation of outbound investment under the current circumstances, a series of documents, including the Guiding Opinions on Further Guiding and Regulating the Direction of Overseas Investment (Document No. 74), the Administrative Measures for the Outbound Investment of Enterprises (Order No. 11), etc., were issued in succession. In practice, regulatory authorities in various regions pay close attention to such outbound investments as large investments in business that are not the main business of the investor or outbound investments made by limited partnerships, etc., and handle them on a case by case basis. Therefore, in practice, many Renminbi funds choose to build certain structures to accomplish their investments in red chip structures before they complete the ODI procedures.

On the other hand, commencing with the issuance on 31 March 2017 by AMAC of the Answers to Questions Relating to the Registration and Recordal of Private Funds (13), which puts forward the principle of professional management of private funds, each subsequent document, including the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (New Asset Management Rules), has continuously reinforced this principle. On 30 September 2018, AMAC issued the Notice on Matters Relating to Strengthening the Administration of the Self-Regulation of Information Disclosure by Private Funds, making the requirements of information disclosure by private funds more stringent, and making the investment, management and exit of funds more transparent. Accordingly, when designing the investments in red chip structures by domestic private Renminbi funds, we need to fully consider the above mentioned regulations from the regulatory prospective of the fund industry.