The Chinese government is preparing to enforce regulations on all fund management companies operating in China — including U.S.-based and other foreign firms — requiring them to set up an internal unit for supervision by the ruling Chinese Communist Party (CCP).
In May, the China Securities Regulatory Commission (CSRC) implemented new changes to its industry rules governing publicly offered securities investment funds. Ignites Asia — an extension of Financial Times — first reported this week that one of the provisions in the new CSRC rules requires companies to establish a CCP apparatus within their companies.
“Fund management companies shall, in accordance with the provisions of the Articles of Association of the Communist Party of China, establish party organizations, carry out party activities, and provide necessary conditions for the activities of party organizations,” the provision states, according to a translation by Ignites Asia. “State-owned fund management companies shall, in accordance with relevant regulations, integrate party leadership into all aspects of corporate governance, and include party building work requirements into the company’s articles of association, so as to implement the legal status of party organizations in the corporate governance structure.”
According to Ignites Asia, other broader national laws in China require all companies in the country, including foreign firms, to establish internal CCP organizations, but those laws had been largely symbolic. The new rules specifically governing fund companies come as major U.S. and international investment firms are working to bring branches of their business to China.
Legal experts who spoke with Ignites Asia said the new CSRC rules are meant to bring stricter oversight to the investment sector. The new rules could raise the fiduciary risk to these foreign investment firms, including those based in the U.S.
A Shanghai-based lawyer who works with foreign business managers told Ignites Asia that this rule is the first explicit “party organization” requirement for the public fund industry. The lawyer, who declined to be named due to the political sensitivity of the matter, told Ignites Asia the new rule applies to foreign-Chinese joint ventures and the Chinese subsidiaries of wholly foreign-owned companies working in China. U.S. multinational firms like BlackRock, Fidelity and Neuberger Berman are among these entities expanding into the Chinese market.
It remains to be seen how much influence these internal CCP organizations may hold over the various firms working in China, or what carrying out “party activities” might entail. Ignites Asia reported party units in wholly foreign-owned firms are unlikely to have any major executive function. On the other hand, CCP organizations inside foreign-Chinese joint ventures — especially those ventures with Chinese state-owned enterprises — may select senior Chinese executives to represent the CCP’s position at a high level.
Victor Shih, a California-based associate professor who has studied Chinese banking policies, said the new CSRC rules reflect the Chinese government’s desire for “some degree of political control through party members and party cells” of investments within the country.
“For foreign investors, that’s just the price of admission,” Shih told Ignites Asia.
Shih said CCP organizations inside existing business structures often convene to discuss the latest orders and messages coming from the CCP central leadership.
“Sometimes party members have to propagate the spirit of the latest dictates to non-party members and get them to support party policies,” Shih said.
In addition to the potential fiduciary risks associated with the new CSRC rules, foreign investors may perceive political risks to complying with the rules. Logan Wright, the leader of the China Markets Research for the Rhodium Group, told Ignites Asia that the requirement for foreign businesses to accept a CCP organ within their structure will “add to the perceived political risks associated with deepening foreign investment in China.”
“It’s another small signal that China’s system is increasingly diverging from global business practices and norms, rather than converging with them over time,” Wright said.