Contribution - Alfi

Why is China’s asset management industry so appealing?

Stewart Aldcroft, senior advisor, Asian fund management industry managing director, Citi markets & securities services chairman, chez Cititrust Limited. (Photo: Cititrust Limited)

Stewart Aldcroft, senior advisor, Asian fund management industry managing director, Citi markets & securities services chairman, chez Cititrust Limited. (Photo: Cititrust Limited)

By any stretch of the imagination, the opportunities in China’s asset management industry are outstanding. But for many foreign (i.e., non-Chinese) fund management companies (FMC), both getting to understand them and then realising them can be a significant challenge.

The scale of the market can be quite daunting for anyone not familiar with it. While the regulated funds part of the market is closing in on assets under management (AUM) of US$2 trillion, the unregulated sector, which includes private funds, hedge and alternatives funds, wealth management products (issued by banks as alternatives to deposits) and other similarly managed collective investment funds assets, is conservatively estimated to exceed US$10 trillion, and growing faster than the regulated area. In addition, sovereign wealth funds and pension funds also exceed US$4 trillion in AUM.

A key objective of the regulators, the China Securities Regulatory Commission (CSRC), has been to convert a significant portion of the unregulated market to become regulated within five years. By any measure, this represents a lot of money, much of it needing professional management. China’s fund management industry is growing faster than any other, worldwide, and will exceed the scale of the UK within five years based on present estimates.

Open the market to more foreign firms to be accelerated

In 2019, announcements by the top government officials have made clear that long-standing plans to open the market to more foreign firms are to be accelerated, with 100% foreign-owned FMC allowed from 2020. Today, there are many wholly foreign-owned enterprises (WFOE) operating in the fund management space, and many of these are expected to transition to full FMC in the next three years. In the regulated funds (retail) area, there are just under 100 approved FMC, less than half of which are set up as joint ventures (JV) between foreign and local partners. Many of the foreign partners are seeking to buy out their local partner.

They can own 51% from 2019, but this can rise to 100% in 2020. But some of the locals are not willing ­ sellers, which can lead to more difficult negotiations. There are some foreign owners that are also not willing to sell, as they are making very substantial profits from their minority-owned JV.

The “one + one rule”

This has led to another market opening change, which is that foreign firms may now also operate under the “one + one rule”, whereby they can own one FMC 100% and hold a minority (i.e., 49% or less) of another business. This is a well-established rule that previously had only been applicable to ­ Chinese firms, but extending it to foreign firms will allow a great deal more flexibility as to how they may operate. It is essential, however, that the two firms operated totally independently of each other.

For example, the foreign FMC may wish to own 100% of a Chinese FMC and hold a minority stake in a fund distribution business (mutual funds are still mainly distributed by the major banks, and a few other wealth and financial services firms). Or they may retain their minority in an existing JV FMC and create another new one where they own 100%. There can be a number of other permutations of this too.

Brand awareness, a major challenge

A major challenge for foreign firms entering the market will be brand awareness. The big global brand names in fund management have been unknown in China, so a variety of strategies will be required, potentially including poster and advertising campaigns, social media and other areas of sponsorship.

China presents many opportunities for all those willing to take on the challenge, but it will be important to stay patient and allow them to evolve, as whilst we can be sure change will happen, the timeframe will be of China’s choosing. And depends on how much it perceives a need to mobilise foreign participation to increase competition, which will drive up standards. The recent announcements have indicated a need on China’s part, to accelerate the influx of foreign players in both the asset management and securities markets, thus leading to many opportunities for those willing to take part.

More news on the fund industry in  Paperjam’s Alfi  supplement.