Luxembourg UCITS And China

Over the last decade, a combination of government support, the interest of the supervisory authority in the development of the fund location, and a major effort by the fund industry have given Luxembourg a leading role in investing in the People's Republic of China. Gast Juncker, a partner at the law firm of Elvinger Hoss Prussen in Luxembourg, comments.

Foreign investment is only allowed to a limited extent and can only be carried out in a state-controlled economy through a channel approved by the Chinese government. For the fund industry (and especially for UCITS), access through a quota system, direct access through the so-called "Stock Connect" programmes and direct access to the Chinese bond market are of particular importance.

Access to the Chinese capital market through investment quotas

The breakthrough in product design when using these investment quotas for UCITS came with the introduction of the RQFII (RMB Qualified Foreign Institutional Investor) quota system in 2011. This new channel facilitates the return of 'offshore' renminbi to China. In 2013, a Luxembourg UCITS was the first to be approved for a 100% direct investment in China. This is made possible by the fact that the investment channel allows the use of the same investments as QFII, but does not provide a lock-up period and also allows a daily return of capital from China without the need for currency exchange.

Interestingly, this investment channel was already available for use by Luxembourg funds before Luxembourg received its own RQFII quota. The Chinese authorities agreed that Luxembourg UCITS, which outsource the investment management to an external manager (either directly or through a management company), will use the RQFII quotas of the countries in which the investment managers are based. The classic example was the appointment of an investment manager in Hong Kong, which needed the Hong Kong RQFII quota to work in favour of the Luxembourg fund. At the present time, the use of the Luxembourg RQFII Quota, which was granted in 2015, also makes it possible for Luxemburger verwaltungsgesellschaften (management companies or mancos) to outsource the management of a UCITS through the use of their own RQFII quotas to investment managers who do not have their own RQFII quota feature.

Direct access to the Chinese...