China offers global asset managers the prospect of a lucrative stream of profits if they can outflank their rivals in the race to build mainland investment businesses with scale.
All international players, however, face a thicket of complex decisions as they enter China’s rapidly evolving investment market.
Non-Chinese players can choose whether to work with a local partner in a joint venture, establish a wholly foreign-owned enterprise (WFOE) or pursue both options. Expectation is rising that China will allow international players with a WFOE licence to launch public funds to be sold to the mass market in 2021.
Other decisions include whether to prioritise “onshore” (managing Chinese investors’ money in mainland China), “inbound” (global investor inflows into China) or “outbound” (running Chinese money in international markets).
At the same time, the regulations covering these channels are changing, adding to the challenges facing global managers.
The potential rewards, however, are huge.
The pool of assets sourced from Chinese clients is forecast to increase from $5.3tn to $9.3tn as early as 2023, according to a report this month by Morgan Stanley and Oliver Wyman, the consultancy.
Winning a 10 per cent share of the Chinese market would deliver annual revenues of about $4bn, a boon to international managers that face severe pressure in their home markets.
However, global asset managers still regard China as a difficult challenge despite moves by Beijing to open the investment market to international competition.
Reform in 2018 permitted foreign players to apply for 51 per cent majority control of domestic fund management groups for the first time. This added to speculation that some of the foreign asset managers that own minority stakes in 19 of China’s mutual fund companies would turn these holdings into controlling positions.
No deals have yet transpired, possibly due in part to the threat of an escalation in the trade war between Washington and Beijing.
Asset managers are reluctant to admit publicly that political considerations could influence their thinking.
Speculation abounds that JPMorgan Asset Management, Morgan Stanley and HSBC have already reached agreements that would allow them to assume majority control from their joint venture partners, which could be formally announced if the US and China resolve the trade dispute.
Invesco has also moved towards majority control of its Great Wall joint venture. The Atlanta fund manager revealed last year that assets reported by the joint venture had been consolidated into its own accounts for the first time since the partnership was formed in 2003 with China Huaneng, a state-owned power company.
“Our China business continued to grow with long-term inflows of more than $4bn and an additional $9bn of inflows into the money-market fund platform in 2018. Assets managed by the Great Wall joint venture increased by around 50 per cent last year,” says Andrew Lo, head of Asia-Pacific for Invesco.
Mr Lo declined to discuss possible changes in the ownership of Great Wall.
He says sentiment among local and international investors has shown signs of “real improvement” in the past 12 months, helped by stronger Chinese economic data and moves by index providers, such as MSCI, to include or increase weightings of Chinese assets in widely followed benchmarks.
The gradual inclusion of China’s A-shares into MSCI and FTSE equity indices could boost portfolio flows by more than $150bn, while adding Chinese bonds to fixed income benchmarks could result in additional inflows closer to $300bn, according to the IMF.
“The index inclusion process is moving faster than expected,” says Mr Lo.
Peter Alexander, managing director at Z-Ben, a Shanghai consultancy, warns that most asset managers are underprepared for important and rapid change that could follow a rapprochement between Washington and Beijing. He believes Chinese regulators will take further steps to liberalise the investment market, possibly allowing foreign players to acquire 100 per cent ownership of local firms.
Such a change may suit BlackRock, which has stated its ambition to be one of China’s top asset managers. It already owns 16.5 per cent of Bank of China Investment Management, part of Bank of China. This is regarded as a legacy holding that will not be increased. Discussions have been held with other Chinese groups, including CICC Fund Management, a subsidiary of China International Capital Corporation, the state-backed investment bank.
“We hope to have a majority-controlled asset management [business] in China and we are very engaged with the Chinese regulators,” Larry Fink, BlackRock’s chief executive, told the Financial Times this month.
BlackRock this month recruited Tony Tang, a former chief executive of China Asset Management, as its new head of China. The move underscores its determination to beef up its mainland operations.
The past 12 months have seen a flurry of appointments to leadership roles in China by global players.
Investec Asset Management hired Eric Fu, previously head of HSBC’s Asia broking services business, as head of greater China, a new role based in Hong Kong.
Xin Shao joined Principal Global Investors in February as managing director for China, a new role at the $431bn US asset manager. He was previously vice-chairman of Beijing Jiumu Capital Management.
In March, State Street Global Advisors recruited Alex Sun from HSBC Jintrust Fund Management as head of China, a new role at the world’s third-largest asset manager.
In December, UBS brought in Raymond Yin to replace the long-serving Rene Buehlmann as head of Asia Pacific in its asset management division. The veteran Mr Yin, a former chief executive of Chongyang International AM, says China is a “strategic priority” for UBS. He welcomes reforms introduced last year designed to reduce risks in the financial sector. Wealth management products that carried guaranteed payments and promises of unrealistically high returns were subject to tighter rules, leading to a fall in sales.
“The introduction of more stringent rules by regulators has helped create a more level playing field that has been helpful to legitimate players,” said Mr Yin.
The stricter rules covering wealth management products led to increased demand in 2018 for money market funds and exchange traded funds.
Updated guidelines issued last year permitted commercial banks to set up dedicated wealth management subsidiaries, allowing them to ringfence this business from the parent group.
About 30 commercial banks have announced plans to pursue this strategy.
“Banks’ wealth management subsidiaries could become significant players in the future, developing into diversified and competitive asset management businesses,” says Lan Shen, an economist at Standard Chartered Bank.
Z-Ben forecasts that assets held in China’s mutual fund industry will reach $12tn by 2027 and Mr Alexander warns that local managers will not idly wait for foreign competitors to eat their lunch.
Global asset managers should also prepare for regulators to accelerate the development of China’s private pensions market, even if they are not permitted to participate immediately.
Fidelity International has begun its preparations. It agreed last year to act as a research consultant in a partnership with ChinaAMC to launch target-date retirement funds, aiming to fill a gap in the nascent private pension system. Fidelity established its first Chinese office in 2004 and was the first foreign manager to be granted a private fund WFOE licence.
“Fidelity is the slow, steady and methodical player,” said Mr Alexander.
Six international managers — UBS, Invesco, JPMorgan, Schroders, BlackRock and Fidelity — have now established a lead in building their China operations, according to Z-Ben.
The chasing pack faces significant challenges if they want to grasp the China prize.