China has opened the gates to foreign fund managers, giving them unprecedented access to the world’s second-largest asset management market. But it will not all be a magic carpet ride for the aspirants as challenges persist, writes Sophia Luo
FOLLOWING IN THE FOOTSTEPS of rival BlackRock, Fidelity International obtained long-awaited regulatory approval from the China Securities Regulatory Commission (CSRC) to set up a wholly owned mutual fund unit in Shanghai at the beginning of August, sounding the clarion call that China’s asset management market is up for grabs.
According to a June report in The Economist, about 20 global investors are setting up fund management firms in China, and others are launching private securities funds. Among the global asset managers already in China are: Goldman Sachs, which announced a wealth management venture with ICBC; French fund manager Amundi, which has tied up with Bank of China; Schroders, the British investment group that joined hands with the Bank of Communications; and JPMorgan Asset Management, which will pick up a stake in China Merchants Bank’s wealth business.
The country’s regulators have made big strides in opening up the domestic asset management market, whetting the appetites of global asset managers. Hailed as the world’s second-largest asset management market after the US, China is where global asset managers are placing high hopes of finding an outlet for their ambitions. McKinsey predicts that, by 2025, total assets under management (AUM) of the Chinese market will hit RMB196 trillion (USD30 trillion) from RMB116 trillion by the first half of 2020, while management consulting firm Oliver Wyman forecasts that AUM in China will almost double to USD14 trillion in 2022 from USD7.4 trillion in 2018, accounting for 15% of total global market share. This represents a compound annual growth rate (CAGR) of about 10%.
Foreign global asset managers are vying for a seat at such a capital feast. China International Capital Corp estimates that foreign investment-controlled/wholly owned asset management companies could account for 10-15% of the market size.
SOONER RATHER THAN LATER
Liu Linlin, a Beijing-based partner at King & Wood Mallesons, says that in July 2019 the Office of the Financial Stability and Development Committee, under the State Council, utilising the principle of “acting sooner rather than later”, rolled out 11 measures to further open up the financial industry and speed up allowing foreign investor access to restricted industries.
In April 2020, China scrapped foreign ownership caps in its mutual fund and securities sectors. By the end of last year, Shanghai, Beijing and Shenzhen expanded two pilot programmes – qualified domestic limited partner (QDLP) and qualified domestic investment enterprise (QDIE). From July to October 2020, Suzhou and Xiamen issued new Qualified Foreign Limited Partnership (QFLP) policies. This year, Hainan province, and Chongqing and Suzhou cities joined a QDLP pilot scheme to polish their brand images as magnets for investment.
Adam Chen, a partner in AnJie Law Firm’s Shanghai office, believes the opening up of the nation’s asset management market complements the rising domestic interest in retirement planning, green financing and technology financing, which could be key growth areas for both domestic and foreign asset managers.
Chen points to the vast pool of savings belonging to China’s burgeoning middle class, but says much of the nation’s household wealth remains in bank deposits, property markets and insurance. The rapid development of the capital market may increase investor interest in mid and high-risk assets, and unlock the potential of funds, stocks and bonds.
China is on the cusp of a demographic shift, with a massive and growing population of older people. Deficiencies in the nation’s pension system have subsequently come into focus.
Citing a China Asset Management Market 2020 report jointly published by China Everbright Bank and Boston Consulting Group in May, Chen says the country’s total pension assets are expected to hit RMB20.3 trillion over the next five years, at nearly 10% CAGR. Undoubtedly, he says, such figures paint a rosy picture and make pensions “priority among priorities” for domestic and foreign asset managers in their strategic push into the market.
GBA CLOSING THE GAP
Further enhancement of mutual access between the financial markets of mainland China and Hong Kong is generating a great deal of market excitement, and also intensifying the activity of China’s asset management sector. As the long anticipated Wealth Management Connect in the Guangdong-Hong Kong-Macau Greater Bay Area (GBA) and the southbound leg of the Bond Connect proceed, global capital is expected to get onboard the investment boom for onshore core assets, and play a bigger part in the Chinese market.
Adam Chen, a partner at AnJie Law Firm’s Shanghai office, says the GBA has long been the spearhead for opening up China’s asset management industry. He highlights the Opinions on Providing Financial Support for the Development of the Guangdong-Hong Kong-Macau Greater Bay Area, jointly unveiled by the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange in May last year.
The opinions propose measures to launch a pilot project for the cross-border investment of private equity investment funds, and allow Hong Kong and Macau institutional investors to invest in private equity investment funds and venture investment enterprises (funds) in the mainland areas of the GBA through the Qualified Foreign Limited Partnership (QFLP) regime, delivering good news to global asset managers betting big on the Chinese market.
“Financial products of mainland China and Hong Kong/Macau are highly complementary, with each having its own advantages and disadvantages,” says Payne Huang, a senior partner and director of the Shenzhen office at Hui Ye Law Firm. He deems the upcoming Wealth Management Connect – the two-way scheme that allows Hong Kong and Macau residents to buy investment products sold by GBA banks, and residents in nine Guangdong cities to invest in products sold by Hong Kong and Macau banks – a golden opportunity for the retail banking businesses of domestic and offshore financial institutions, adding it will force the banking sector to cultivate and develop cross-border financial services, and reshape the landscape of the domestic wealth management market.
Chen says the rollout of the southbound leg of the Bond Connect – an
investment channel that offers overseas and mainland investors access to each other’s fixed income markets – is equally well timed. As data from Natixis show, the foreign share of mainland China’s bond market reached 3.44% in April, well below that of the bond markets in developed economies. He says that while foreign ownership remains, it grows at a rapid pace. The foreign investors’ holdings of renminbi-denominated bonds are rising at an average rate of 40% per year, and have become one of the most remarkable marginal increments.
“The launch of the southbound leg of the Bond Connect expands the scope of investment targets available for mainland investors,” says Chen. “It will lead to outflows of onshore renminbi and alter the situation where net inflows in the bond market have remained consistent, thus eventually facilitating the two-way flow of cross-border capital and spurring healthy, long-term market development.”
With the southbound leg of Bond Connect and Wealth Management Connect just around the corner, and the announcement from China’s central bank to support Shanghai piloting the free exchange of renminbi, Pan Xinggao, a Beijing-based partner at Commerce & Finance Law Offices, says the renminbi’s digital and international journey will move to the fast track, as well as giving global asset managers a leg-up to choose international investment targets and allocate their assets in a more diverse manner.
“However, as the renminbi share of the foreign exchange market is on the rise, a conflict of interest is unavoidable,” he says. “In the short term, this may lead to a dramatic change of the global monetary system and make competition much fiercer, thus having an impact on the regional asset allocation of global asset managers and the volatility of their short-term gains. But in the long run, it will be a bright future with common prosperity.”
Apart from the upcoming new initiatives, James Wang, a senior partner at Jingtian & Gongcheng, says there are other policies that international asset managers are eagerly looking forward to, including the connection of interbank and exchange bond markets, as well as measures to allow domestic asset managers to provide cross-border asset management and investment advisory services for funds issued overseas.