China: Tomorrow’s largest investment market
China’s investment management market is set to reach $17trn (€14.4trn) by 2030. But there will be no easy path to riches for foreign players
- Foreign managers can now take majority ownership in Chinese fund management entities
- China is a high-growth asset-management market and is set to overtake the US in AUM terms next year
- With 30-40% profit margins, China is a highly attractive market
- Yet local know-how will be crucial as most foreign managers do not have the domestic focused strategies likely to be in demand
Beijing has officially opened the doors of its multi-trillion-dollar funds management industry to overseas firms. Up to now, global firms have been limited to owning 49% of Chinese fund-management businesses. But with a new relaxation on foreign ownership, global firms can raise their investments straight to 51% and, in three years’ time, to 100%.
In April, the China Securities Regulatory Commission (CSRC) published guidelines for foreign participation in China’s fund-management industry. The latest relaxation had been anticipated, says Desiree Wang, head of China for JP Morgan Asset Management (JPMAM). She says: “Regulatory changes present global managers like us with a big opportunity to increase their presence in the Chinese asset-management industry. It has been evident for a couple of years that China is committed to gradually opening its funds management market to foreign players.”
JPMAM has been watching developments in China closely, says Wang. The firm has a 49% stake in China International Fund Management Company, a joint venture with Shanghai International Trust Company (SITICO), a subsidiary of Shanghai Pudong Development Bank (SPDB).
China is poised to become the world’s largest asset management market after the US by 2019. According to the asset-management strategy consultancy Casey Quirk – a Deloitte practice – China is the world’s only large, multi-trillion-dollar asset management market to have seen net new flows above an average 30% over the past five years.
In a white paper, Casey Quirk says China’s fund management industry will account for about the same amount of net new flows as all other global markets put together between now and 2030. By then, the Chinese market should represent more than $17trn (€14.2trn) in assets under management – up from $2.8trn in 2017. The annual growth rate should average 15% through to 2025, moderating to 12% from 2025-30.
For foreign fund managers it is not just the sheer size or the rapid growth that makes China such an interesting market. It is also a market with 30-40% profit margins, according to Shanghai-based Z-Ben Advisors. Profitability is set to rise from $4.4bn in 2017 to $32bn by 2027.
But the path to riches in China’s funds management market will be strewn with obstacles. Industry-watchers expect incumbent Chinese funds to immediately ring-fence their businesses from foreign players. Following the CSRC announcement, Z-Ben Advisors canvassed all large domestic managers and said it could not find “a single” manager willing to sell a 51% stake to a global asset manager, no matter the price.
Benjamin Phillips, Casey Quirk’s principal investment-management lead strategist, says access to the Chinese market remains a challenge. “It will become less of an issue if there is true energy behind the effort to allow majority foreign ownership of Chinese ventures,” he says, adding that the authorities could bring in more regulation alongside further market liberalisation. Phillips also points to the merger of regulatory bodies, with the China Banking Regulatory Commission (CBRC) merging with the China Insurance Regulatory Commission (CIRC), and the possibility of further changes.
Phillips continues: “The priority of China’s regulators is to have a strong domestically anchored Chinese asset management industry. They have been working on this for the last 20 years. The Chinese government has a vested interest in ensuring that every regulation encourages the growth of Chinese asset managers. Regulation and competition are two different things. Even if you have a level playing field on regulation, the fact is that Chinese asset managers have had a lot of time to grow, and to build relationships and infrastructure.”
For foreign firms, the main challenge in the China market is in overcoming cultural issues that have been built on distinct rules with different players, notes Phillips. Foreign managers might find it challenging to distribute their products. And indeed, they may not be capable of producing the products the Chinese market wants – Chinese securities rather than foreign stocks and bonds. Flows into global products represent no more than 6% (about $715bn) of industry AUM.
“As a result, if foreign managers do not have the skills in managing Chinese securities in China, that is a big challenge,” says Phillips. “They end up playing in the offshore market, a small component of the Chinese marketplace.”
An issue for them will be to retain sight of global best practices while maintaining the Chinese cultural characteristics that appeal to Chinese distributors and asset owners. Phillips suggests that global firms will have to find a way to work together with Chinese partners, which could mean taking a more flexible approach.
Aries Tung, managing director of UBS Asset Management (UBS AM), China, says Chinese and foreign firms have different approaches to fund management. He says: “Foreign players like us tend to buy and hold. In every five years, we may turn over our portfolio only once. Chinese fund managers could turn over a portfolio as many as 20 times in a year. This is a big difference in our risk management concept.”
As of February, there were 116 mutual-fund asset-management firms registered with the Asset Management Association of China (AMAC). Of these, 45 are joint ventures and 71 are domestically owned. Claire Shen, Willis Towers Watson ’s Greater China research specialist, says foreign fund managers are experiencing healthy growth in China’s onshore market.
As of Q4 2017, seven joint-venture asset managers were among the top 30 largest mutual-fund asset managers in China in terms of AUM. “About 30 wholly-foreign-owned enterprises [WFOEs] have been set up since September 2015, and we expect the number to continue to grow,” Shen notes. WFOEs are able to directly raise money from domestic investors if they have the relevant licence from AMAC.
In its ranking of the top 25 foreign firms in China, Z-Ben Advisors rated UBS Asset Management at the top, followed by JPMorgan Asset Management, Schroders, Invesco and BlackRock.
The Chinese fund investment market comprises mutual (also known as public) funds, and private funds. The basic difference between the two is that mutual funds are able to offer and advertise their products to the market at large, while private funds cannot. Mutual funds must have a minimum of 200 investors and a minimum investment per person of RMB1000 (€131). They are strictly regulated in terms of investment strategies and products offered.
Private funds, which are conducted through private placements, can have a maximum of 200 investors. The minimum start-up investment per investor is RMB1m. Unlike mutual funds, private funds cater to high-net-worth individuals and institutional investors. They have more flexibility and are less encumbered by rules and regulation.
Tung notes that foreign firms have been permitted to own 100% of private fund management companies since June 2016, and also to apply for the private fund management licence to provide onshore private fund products. UBS AM first entered China in 2005 through UBS SDIC Fund Management, a joint venture with China’s State Development & Investment Corporation. The entity offered onshore mutual fund management and services.
Last November, UBS AM launched the first private onshore-equity fund in China, soon after it was granted a private fund management licence. UBS AM and its joint venture or subsidiaries are understood to manage assets totalling $60-70bn from clients in China. AMAC figures put the size of the private fund market at about $1.7trn as of 2017 according to JPMAM’s Wang – a similar size to the public mutual fund market. The private fund segment includes $360bn in private securities funds, private equity, venture capital and other categories of products.
Private fund managers are quietly confident that their business could get a further boost when Chinese authorities relax rules allowing pension funds, banks and insurance companies to invest in their funds. Another growth opportunity will come from an anticipated easing of capital controls to allow investment in overseas assets. Foreign managers might play an important role in cross-border investing.
Wang notes that Beijing has recently been lifting various quotas, including for outbound investment. For example, the quota for qualified domestic limited partner and qualified domestic investment enterprise programmes in Shanghai and Shenzhen have been increased to $5bn respectively.
She says this is just the start, with more announcements likely to boost outbound activities.
“Private institutional and private investors in China have so much wealth. So far, the offshore part represents a very small part of their investment. Even if they move just 2-3% offshore, that is a big opportunity for us,” Wang adds.
Foreign fund managers see themselves as a conduit for Chinese investors going offshore, and for international investors entering China. Tung says: “When we look at China, we look at three lines of business – onshore, inbound, and outbound.” Chinese groups such as China Post Global (see China Post Global’s worldwide ambitions) are already positioning theselves to be two-way gateways for fund flows.
Phillips says Chinese asset managers will become big enough in their own right to continue to globalise and to acquire asset management skills outside China. “Over the next 10 years, they could start buying foreign fund managers,” he says.
China Post Global’s ‘landmark’ European ETF deal signals its worldwide ambitions
In 2016, China Post Global (CPG) acquired the exchange-traded fund (ETF) business of Royal Bank of Scotland, giving it a foothold in Europe. The acquisition delivered assets of €360m and a team to immediately translate CPG’s business plan into reality.
Today, CPG – which is headquartered in Hong Kong – has built up an offshore portfolio of $4.5bn (€3.75bn). Danny Dolan, CPG managing director in London, says the deal was a “landmark” as CPG became the first Chinese group to have an ETF platform in Europe.
The ex-RBS ETF business focuses on two niche areas – commodities and Asian emerging markets. They are a good fit, says Dolan, because China is the world’s largest consumer of commodities – and international interest in emerging Asia exposure is rising.
CPG offers ETFs to the wider market and also offers bespoke institutional funds, the latter catering mostly to Chinese and Asian institutions. Dolan says the European business has doubled its AUM in the past year. Future growth, while expected, will be dependent on the pace of relaxation of capital controls in China, which will affect outbound investment, as well as on the success of new ETF products.
CPG’s onshore parent China Post Fund (CPF) was created in China in 2006 as a fund management business when China Post – already a large financial services player – formed a joint venture with Beijing Capital Group and Sumitomo Mitsui Banking Corp (SMBC) of Japan.
CPF manages RBM180bn (€23.6bn) in assets and operates 50 funds and 20 separate-accounts. Dolan says its success over the past 12 years has come from targeting niche sectors and strategies within the Chinese markets.
The firm set up its CPG international arm in 2015 as a gateway for investment into and out of China. Its parentage gives it insights into both the Japanese and Chinese markets from which to launch innovative products in Europe. “It gives us an edge to be able to add value to European investors,” he says. “Last year, we launched a smart beta ETF in Japan, drawing on SMBC’s Japanese network to gain access to a best-of-breed strategy on the Japanese market.”
CPG is preparing to launch Europe’s first smart-beta ETF for China. “We see an opportunity to capitalise on our two-way gateway strategy. China is opening up, and the inclusion of Chinese A-shares on the MSCI index is important. Chinese regulators are slowly loosening up the quotas for outbound investments,” Dolan says.
Dolan says Chinese investors use quotas to access offshore investment for diversification. “We see global investors becoming more mindful of China, and the investment opportunities there. Given that China has been a global growth engine, this rise in interest in Chinese exposure is inevitable.”
But investors are still concerned about volatility in Chinese equities, leverage issues and lack of familiarity. “We are designing China products with these investor concerns in mind and trying to mitigate some of the risks,” he says.