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Foreword

 

On November 15, 2023, the State Administration of Foreign Exchange (“SAFE”) published a column titled Steadily advancing high-level opening up in the foreign exchange (“FX”) sector and continuously improving the level of cross-border investment and financing facilitation, according to which SAFE will prudently promote cross-border equity investment pilots to better support the innovative development of cross-border investments. In details, it will conduct FX administration pilots under QFLP and QDLP regimes in some regions, support equity investment funds to carry out cross-border industrial investments and promote regional financial reform and opening-up in an orderly manner.[1]

 

We noticed that many people from various asset managers and investment institutions forwarded or reposted this article. QFLP and QDLP businesses have once again attracted market attention.

 

The year 2021 marks the 10th anniversary of QFLP pilot scheme. In 2023, QFLP business rolled out rapidly across the country. However, while it "seems active", some pilot areas or institutions may find it is "difficult to implement". What's the secret behind this?

 

QDLP and QDIE[2] pilot scheme has also been implemented for a decade by 2022. In 2023, QDLP business entered into a deep "calm" after the "hustle and bustle", but there are still some "bright stars" in the market.

 

QFLP and QDLP are still small-scale pilot schemes so far. We can conclude that from various perspectives QFLP and QDLP businesses need to be done by constantly learning from experience and lessons of precedents and peers. For example:

 

(1) It is a local pilot business. Therefore, the regulatory rules vary from place to place, and the interpretation and implementation may have some differences with the written rules;

 

(2) If a manager or a product constitutes a private fund manager or a private fund under the laws of China, it also needs to comply with applicable regulatory rules accordingly;

 

(3) Issues with respect to FX and cross-border RMB are the core issues of such business, which need to be handled prudently;

 

(4) There are both differences and overlaps between QFLP/QDLP and FDI/ODI; and

 

(5) As cutting-edge pilot schemes, there are many issues that need to be considered and handled in practice.

 

In mid-2023, Premier Li Qiang signed an order of the State Council promulgating the Regulations on the Supervision and Administration of Private Investment Funds (the "Private Funds Regulations"), a major legislation in the field of private funds regulation, which came into effect on September 1, 2023. One of the highlights is to accelerate the design of top-level systems for QFLP and QDLP businesses.

 

What are the developments of QFLP and QDLP in 2023? What can we expect in 2024? This report will introduce relevant legislative progress, policy adjustments, regulatory developments, and hot events, based on the author's project experience.

 

It is important to note that this report is not intended to be a comparison of the specific provisions in different pilot regions. On the one hand, most of these rules are publicly available[3]; on the other hand, actual practices vary from place to place, and it is impossible for a high-level pilot rule to include all detailed aspects.

 

Regarding how to select QFLP and QDLP in different pilot regions, in our experience, while eligibility requirements, preferential policies and FX quotas are certainly important elements for considerations, it is also quite important to consider it in multi-dimensional perspectives (e.g., service level, business proficiency, supportive policies and convenience of FX remittance in pilot regions).

 

As the ancient sage said in his article, everything has pros and cons, and no one and nothing is omniscient and omnipotent. What is most important is that what suits yourself is the best, and we should avoid simply following others.

 

At last, we appreciate the support to this report by CITICS Investment Services Company Limited, KPMG, Beijing Private Equity Association, and Shenzhen Venture Capital Association, all of which have long been working with QFLP and QDLP fund managers.

 

References:

[1] http://mp.weixin.qq.com/s/d3DALd626x4-HlC6zj8irw

[2] QDIE in Shenzhen is the same in nature as QDLP in other pilot regions. References to QDLP in this report refer to both QDLP and QDIE unless explicitly stated otherwise.

[3] QFLP and QDLP policy documents in some regions are not publicly available.

 

Please click on the following link for an English version of the Annual Review and Outlook: QFLP and QDLP as Cross-border Investment Funds (2022-2023), written by Merits & Tree Law Offices and supported by CITICS Investment Services Company Limited, KPMG, Beijing Private Equity Association, and Shenzhen Venture Capital Association.