Cross-Border Update December 2015

Quarterly Assessment

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 Cross-Border Updates: Quarterly assessment
December 2015

Not all online channels are created equal Three is the magic number

Online WFOE
With QDLP, Investment Advisory and Investment Management
Managers need to map their approach carefully to an online
structures now being used onshore. Z-Ben Advisors believes winners
distribution strategy. Despite the sector growing rapidly as a whole,
will be determined by how they use the WFOE. It remains the most
growth remains fragmented and selling offshore products in scale will
important tool for foreign managers to build out their China strategy.
require further analysis of channels for capability and scalability.

RMB-denominated is a loose term Targets

RQDII Insurers

While the QDII cap remains in place, FMCs are currently using RQDII as We believe insurers with high fixed-term deposits as a proportion of
a key offshore channel. We believe RQDII will become an increasingly total assets will have the greatest sense of urgency in diversifying
important outbound program that will ride quickly on the back of exposure offshore. We have narrowed a wide field of insurers by
quota bottlenecks. asset composition and QDII quota to assess the likely next movers.

Cross-border quarterly Z-Ben Advisors | www.z-ben.com 2

 Z-BEN ADVISORS Ltd. (Hong Kong)
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Central, Hong Kong SAR

Research Affiliate
Z-BEN ADVISORS Ltd. (Shanghai, China)
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Pudong New Area, Shanghai
China 200122
+86 21 6075 8155

Disclaimer
The contents of Cross-border Quarterly (Product hereafter) are for informational purposes only. The data contained herein is based entirely upon the available information provided in public reports
by the locally operating fund managers. The contained information has been verified to the best of Z-Ben Advisors and its research affiliates ability, but neither can accept responsibility for loss
arising from the decisions based upon the product. The Product does not constitute investment advice or solicitation or counsel for investment in any fund or product mentioned thereof. The
Product does not constitute or form part of, and should not be construed as, any offer for sale or subscription of and fund or product included herein. Z-Ben Advisors and its research affiliate
expressly disclaims any an all responsibility for any consequential loss or damage of any kind whatsoever resulting, directly or indirectly, from (a) the use of the Product, (b) reliance on any
information contained herein, (c) any error, inaccuracy or omission in any such information or (d) any action resulting therefrom.

Disclosure
Z-Ben Advisors and its research affiliate, currently provides other products and services to some of the firms that are included in the Product. Z-Ben Advisors and its research affiliate may continue
to have such dealings and may also have other ongoing business dealings with other firms provided for in the Product.

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 Table of contents

Presence and distribution Institutional capital trends

Distribution: Overview ……………… 5 Insurance: Offshore investment breakdown ……………… 29
Distribution: Fee extraction comparison and Insurance: Taikang Life steps out to issue FI mandate ……………… 30
partnership opportunities ……………… 6 Insurance: Top and Mid-tier targeting ……………… 31
Distribution: IFA development ……………… 7 Appendix 1: Overview of cross border programs (4Q15) ……………… 32
IFA Case study: Noah vs Jupai ……………… 8 Glossary of cross-border acronyms and terms ……………… 33
Distribution: Domestic vs. HK IFAs ……………… 9
Distribution: Online channels ……………… 10
KYC in China: Overview ……………… 11
KYC in China: MRF requirements ……………… 12
WFOE: Three is the magic number ……………… 13

Inbound programs
Malaysia RQFII: Mixing Singapore’s and Korea’s model ……………… 15
Could China tap the Islamic finance market? ……………… 16
Subadvisory: Finding large managers with Asian & EM exposure ……………… 17

Outbound programs
QDLP: An ever-opening program ……………… 19
QDLP: Distribution approach comparison ……………… 20
QDLP: All bases covered ……………… 21
QDLP case study: UBS may be the first to bring scale ……………… 22
QDLP Case Study: Value Partners’ strategy in China ……………… 23
QDIE: How mainland capital invests in offshore hedge funds ……………… 24
RQDII and QDII dynamics ……………… 25
RQDII: FMC SA RQDII products ……………… 26
QDII2: Bank relationships will be key ……………… 27

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 Presence and distribution Inbound Outbound Institutional opportunities

Distribution: Domestic vs. HK IFAs

Points of comparison between domestic and HK IFAs

Domestic IFAs Hong Kong IFAs

Products

• Offer products both domestic- and overseas-focused products to clients, • Given fewer regulatory restrictions, HK IFAs distribute a wider range of
although demand for onshore products is much higher. products, such as PE, overseas property, MPF and insurance.
• Longer-term, many IFAs may focus on selling on their own products. • Focus on distributing others’ products as third-party.

Clients

• Target mainly HNWIs and few institutional investors, such as insurers. • Medical insurance products and asset allocation products, such as products
• Chinese investors prefer domestic products, believing higher risks exist in using foreign currencies, are relatively more popular.
management and fund operation in offshore markets. • Fee structure is very transparent. Management fees depend on product
• PFM customer fees vary widely. types and services.

Criteria for choosing foreign partners

• IFAs value foreign managers’ global reputation, size, employees’
background and investors’ response to road shows.
• Partnerships last only as long as product demand, so short-term
relationships are to be expected.
• Risk-control for products is considered very important.
• Fee structure: typically 50/50 but can be negotiated.
• Level of safety, transparency and reputation.
• HK IFAs restrict the number of their partners, though not as tightly as
domestic IFAs do.
• HK IFAs do extensive due diligence regularly to discover and restrict the
potential risks arising from fund management partners.
• Mainly cooperate with large global fund houses.

Services provided to foreign partners

• Help market the manager’s products and its brand name. • HK IFAs usually do not white label foreign partners’ funds, preferring to
• Willing to do roadshows for foreign managers to enhance reputation and use the foreign managers’ brand strength.
brand recognition. • Much more willing than mainland IFAs to pass on fund manufacturers’
• Have high standard services for both investors and partners. updates, messaging and range information to customers.

Source: Z-Ben Advisors

Z-Ben Advisors CONFIDENTIAL 10

 Presence and distribution Inbound Outbound Institutional opportunities

RQDII and QDII dynamics

Z-Ben Advisors believes FMCs with large QDII quotas – which are now likely exhausted – are first movers in the fast-growing RQDII space and should be approached by asset
managers looking for onshore fundraising opportunities. FMCs are currently obtaining RQDII licenses (a QDII license being prerequisite for application) onshore in a bid to
circumvent the current QDII quota hard cap by targeting non-RMB denominated assets and working with investment banks.

RQDII may be a temporary replacement for QDII (Quota-held rankings, USD bn)
Rank FMC Quota Overall share of total FMC QDII quota Rank FMC Quota Overall share of total FMC QDII quota
1 ChinaAMC 3.5 3.89% 6 UBS-SDIC 1.8 2.00%
2 Harvest 3.4 3.78% 7 Hua An FMC 1.2 1.33%
3 China International FMC 2.7 3.00% 8 Fortune SG 1.05 1.17%
4 Southern FMC 2.6 2.89% 9 Rongtong FMC 0.9 1.00%
5 E-Fund 1.9 2.11% 10 (equal) BOC FMC 0.7 0.78%
Franklin Templeton
10 (equal) 0.7 0.78%
Sealand

Onshore (Mainland) Offshore

CNY CNH RMB-denominated
FMC
assets
RQDII

Mainland QDII quota scarcity pushes flows to the RQDII channel

Investor(s) Investment bank Firms are now using the RQDII channel to target non-RMB
denominated assets in a bid to capitalize on QDII quota scarcity.

Hard QDII quota

QDII

cap in place

CNY USD (or other)

Non RMB-denominated
assets

Source: Z-Ben Advisors

Z-Ben Advisors CONFIDENTIAL 26

 Presence and distribution Inbound Outbound Institutional opportunities

QDII2: Bank relationships will be key

Z-Ben Advisors believes the use of Shanghai’s free trade account (FTA) infrastructure as a foundation for QDII2 flows places banks with presences within the FTZ (both foreign
and domestic) in a potentially lucrative gatekeeper position. We believe any managers wishing to utilize the QDII2 scheme should be screening banks within the Shanghai FTZ
for selling capabilities and FTA operability.

Foreign and domestic bank candidates for QDII2 within the Shanghai FTZ

Foreign banks
 Foreign banks dominate the Bank QDII scheme: HSBC, Citi and Standard Chartered
hold over 50% of quota. We believe these three leaders will be looking to expand
their scale on the Mainland by launching QDII2 as fast as possible.

 HSBC, Citi and Standard Chartered are likely to demand higher fees than their other
foreign bank counterparts who all have a smaller bank network to channel customers
into the FTZ. However, QDII2 may be a more level playing field due to its wider scope.

Be vigilant of a potential domestic head start:

Despite foreign banks being arguably more capable for participation, regulators may give Shanghai
domestic banks a head start with participating in the QDII2 scheme as seen with the RQFII
scheme with the Hong Kong subsidiaries of Mainland FMCs.

Domestic banks
 In the original QDII scheme, domestic banks gained less traction relative to their foreign
peers (particularly HSBC, Citi and Standard Chartered), domestic banks tended to rent
their QDII quota out while focusing on selling domestically-focused products.

 Z-Ben Advisors believes larger domestic banks will use QDII2 in a bid to build out their
private banking capabilities. Mid-tier and smaller banks may be a lower-cost option for
firms wishing to use the QDII2 channel and coordinate all operations in-house.

Source: Z-Ben Advisors

Z-Ben Advisors CONFIDENTIAL 28