On 2 September 2022, the 18 Measures for Supporting the Linked Development of Shenzhen and Hong Kong Venture Capital Investments in Qianhai by the Authority of Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone of Shenzhen Municipality and the Financial Services and the Treasury Bureau of the Government of the Hong Kong Special Administrative Region (“Hong Kong”) (the “18 Measures”) came into effect. These measures, promulgated by the Authority of Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone of Shenzhen Municipality (the “Qianhai Authority”) in conjunction with the Financial Services and the Treasury Bureau of the Government of Hong Kong (“FSTB”), provide a framework for the implementation of the Plan for Comprehensive Deepening Reform and Opening Up of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, and will be effective for the next three years. It is anticipated that the 18 Measures will harness resources from Shenzhen and Hong Kong and facilitate cooperation across the two cities on innovation and technology, ultimately breeding an international venture capital hub in Qianhai.
The 18 Measures cover the following four major areas which will benefit asset managers, venture capital and private equity firms and other investment institutions through a range of favourable policies and monetary subsidies[1]:
- building an international venture capital cluster in Qianhai;
- facilitating Shenzhen-Hong Kong cooperation on cross-border investment;
- supporting development of a large-scale institutional funds cluster; and
- building an ecosystem for Shenzhen-Hong Kong linked development.
I. Eligible entities: who is eligible for the policy benefits under the 18 Measures?
The eligible entities differ slightly for each of the 18 Measures. As an overview, the eligible entities include the following institutions which intend to register and commence their business in Qianhai (the “Eligible Entities”):
- onshore and offshore venture capital institutions;
- private securities investment institutions;
- international asset management institutions;
- national funds;
- industrial funds;
- buyout funds;
- sovereign funds;
- secondary funds;
- Hong Kong family offices;
- national private equity industry associations; and
- private equity industry associations in Hong Kong.
We note that the 18 Measures have not specified the criteria for each of the Eligible Entities. Therefore, if your institution is considering to enjoy the policy benefits under the 18 Measures, we would suggest you to consult the Qianhai Authority and the FSTB for further details on the relevant eligibility criteria.
II. Policy incentives: what are the new initiatives to facilitate cross-border investments?
The 18 Measures have introduced a handful of policy incentives to facilitate the cooperation on cross-border investments between Shenzhen and Hong Kong. We have summarised these policies as follows:
1. Supporting the Eligible Entities to establish Qualified Foreign Limited Partnership (“QFLP”), Qualified Domestic Investment Enterprise (“QDIE”) and Wholly Foreign Owned Enterprise Private Fund Management (“WFOE PFM”) businesses in Qianhai[2]
2. Link development with Hong Kong Limited Partnership Funds (“HKLPFs”)[3]
3. Facilitation of cross-border capital flow[5]
III. Monetary subsidies: full support for fund-raising, investment, management, and exit
To foster the development of a funds cluster with scale, the 18 Measures have offered various types of policy subsidies and rewards to the Eligible Entities along different stages of investments, as summarised below:
It is worth noting that the 18 Measures also particularly emphasise that the preferential policies thereunder are implemented concurrently with the municipal supporting policies, Nanshan District’s or Bao’an District’s supporting policies. As long as the relevant Eligible Entities meet the corresponding conditions, they may enjoy those benefits on a cumulative basis.
IV. Other highlights
In addition to the above policies and incentives, the 18 Measures also propose to support the development of a pilot scheme on business registration for contractual funds.[14] In the past, since contractual funds were not legal entities, as distinguished from corporate funds and partnership funds, it was unclear as to how business registration for investee enterprises shall be completed in terms of offshore investments, and business registration authorities in different regions may adopt different standards in this regard. However, Shenzhen has now emphasised once again the arrangements for a pilot scheme on business registration for contractual funds, which will debunk the complex yet crucial issues regarding business registration of and exit through investee enterprises’ initial public offerings by these contractual funds.
Moreover, the 18 Measures propose to encourage profit-surrendering by industry guiding funds in Qianhai and support launching a database of high-quality invested projects jointly by Nanshan District and Bao’an District to enhance the role of Qianhai as a carrier for Shenzhen and Hong Kong funds, along with other measures dedicated to creating the necessary ecosystem for Shenzhen-Hong Kong linked development.
V. Conclusion and Looking Forward
In light of the guidance and support provided by the 18 Measures on the opening up of cross-border investment channels between Shenzhen and Hong Kong, we believe more domestic and foreign high-quality asset management institutions will be attracted to settle in Qianhai in the future, assisting Hong Kong investors to participate in the development of the Greater Bay Area through Qianhai.
The 18 Measures have also made it easier for onshore money to invest in Hong Kong’s innovation and technology companies through Qianhai, encouraging institutions in Qianhai to raise capital by way of HKEx listings, and fostering Shenzhen and Hong Kong to build an advanced, innovative financial region together. In particular, the 18 Measures emphasise the support for venture capital institutions to make use of HKLPFs and Qianhai QFLPs to promote cross-border cooperation, which we believe will attract more venture capital institutions to set up HKLPFs in Hong Kong.
The 18 Measures have expanded the channels of investment cooperation between and even beyond Shenzhen and Hong Kong, as many of the preferential policies thereunder are also applicable to non-Hong Kong-funded investment institutions. Further to promoting the linked development of venture capital markets in Shenzhen and Hong Kong, these measures are believed to establish Qianhai’s position as an international venture capital cluster and reinforce Hong Kong’s role as an international financial center. In the longer term, these measures are believed to bring global innovation into the Greater Bay Area, and accelerate the development of Hong Kong as an international innovation and technology hub.
We will continue to keep you posted on any further development relating to the 18 Measures in a timely manner.
References
[1] For the full text of the 18 Measures, please visit the Hong Kong government website at www.fstb.gov.hk/en/financial_ser/financial-co-operation-with-the-mainland_Full-document.html.
[2] Article (1) of the 18 Measures.
[3] Article (4) of the 18 Measures.
[4] In practice, when a HKLPF makes onshore investments through a QFLP fund, the QFLP fund may have only one investor (i.e. the HKLPF) and does not involve any fund-raising activities within Mainland China. In that case, it would require extra time and costs if it is still required to register with the AMAC as a private equity fund in accordance with the relevant regulations under the existing QFLP scheme in Shenzhen.
[5] Article (5) of the 18 Measures.
[6] The FT Account was launched in Qianhai in 2020, allowing both domestic and foreign institutions and individuals in the Qianhai-Shekou Free Trade Zone to perform FT Account-related activities. The 18 Measures mainly highlight the arrangement of allowing Hong Kong venture capital institutions and other offshore entities to open FT accounts. Please refer to the official website of the Qianhai Authority for details: http://qh.sz.gov.cn/sygnan/qhzx/dtzx/content/post_6844599.html.
[7] Denominated in RMB.
[8] Articles (6) and (8) of the 18 Measures.
[9] Articles (7) to (10) of the 18 Measures.
[10] Articles (2) and (12) of the 18 Measures.
[11] Article (3) of the 18 Measures.
[12] Article (13) of the 18 Measures. Article (13) also provides supports for eligible institutions to set up platforms for transferring private equity and venture capital investment interests in Qianhai, and exploring cross-border transfer of private equity and venture capital investment interests.
[13] Article (17) of the 18 Measures.
[14] In April 2022, the Shenzhen Securities Regulatory Bureau proposed to carry out a pilot scheme on business registration for contractual funds and stated that it would cooperate with the Shenzhen Local Financial Supervision Authority to formulate the Implementation Plan for the Pilot Scheme on Business Registration for Contractual Funds in Shenzhen Municipality and relevant operational guidelines to facilitate the implementation of the pilot scheme. We understand that the 18 Measures emphasise and confirm the aforementioned scheme. For details, please refer to: http://www.csrc.gov.cn/shenzhen/c101531/c2321604/content.shtml.
