Beijing Financial Markets Mature as China Turns Gray
WHY YOU SHOULD CARE
China is offering world asset managers access to its traditionally closed financial system.
By Chris Flood
Far-reaching reforms of China’s financial system offer global asset managers the tantalizing prospect of access to a vast investment market with lucrative profit streams. China is on course to be the world’s second-largest fund market behind the U.S., providing the biggest growth opportunity for global asset managers over the next decade.
State regulators said last week that a unified framework, regulating all asset management products, would be implemented by the end of 2020. This confirmed the timing of plans announced in November. Policymakers in Beijing also decided last month to accelerate the opening of financial markets by permitting foreign players to apply for majority control of domestic fund management groups for the first time.
The drive by China’s leaders to reduce the risks across the financial system remains unfinished, and the pace and timing of reforms is uncertain. This complicates the strategic choices facing asset managers.
There are no quick bucks to be made. The transition to a fully fledged fund market will be a warped one.
Amin Rajan, Create-Research
Rene Buehlmann, head of Asia Pacific at UBS Asset Management, says there is “no single correct path” to gain access to China so it is necessary to have many options available. “The regulatory developments will accelerate the development of the onshore asset management industry,” says Buehlmann. “The world outside China has still not recognized the pace of change, the speed with which financial sector reforms are happening.”
UBS has forecast that China’s mutual fund assets could multiply fivefold to reach $7.5 trillion (RMB 47 trillion) by 2025, creating a fee pool worth $42 billion a year. Winning a share of that fee pool will, however, require substantial spending on technology and investments in staff at a time when many international managers are struggling to control their cost base. Buehlmann says finding suitable staff is not easy. “The available talent with experience is limited. UBS has developed a talent development plan with a focus on education to encourage retention but it is a challenge to retain staff, no question about it,” he says.
Amin Rajan, chief executive of Create-Research, the investment consultancy, says foreign managers will have to be patient and determined to succeed.
“There are no quick bucks to be made. The transition to a fully fledged fund market will be a warped one,” Rajan says. Foreign asset managers own minority stakes in 19 of the country’s top 30 mutual fund companies, often as partners with domestic commercial banks.
The decision to immediately allow foreign groups to own up to 51 percent of Chinese asset managers brings forward the prospect of full takeovers. Foreign players, though, decline to comment publicly on whether this option appeals, preferring instead to emphasize the robust health of current joint-venture relationships. In addition to partnerships, international companies including BlackRock, UBS, Invesco and Schroders have acquired wholly foreign-owned enterprise licenses, which allow them to offer private funds to a limited number of investors. This will provide limited growth opportunities but most license holders see this arrangement as a step toward a move into the public funds market.
Lieven Debruyne, Asia-Pacific chief executive for Schroders, the London-listed asset manager, says the rule changes show how deeply China’s government and regulators intend to collaborate with global players. “We take a multipronged approach as it is impossible to predict exactly how the market will develop and what further changes to the regulations might follow,” says Debruyne.
Schroders plans to launch more private funds and will recruit staff to support this. “We are looking to expand staffing quite substantially regarding our investment, distribution and operational capabilities in our wholly owned business and we will also continue to develop our joint venture with Bank of Communications,” says Debruyne.
One objective of the reform program is to encourage retail investors to move out of risky wealth management products, which have fueled massive growth in so-called nonstandard credit assets or the shadow banking sector. Andrew Lo, head of Asia-Pacific for Invesco, the Atlanta manager, welcomes a curb on shadow banking. “The new regulations will be good for regulated fund products, especially at a time when China is trying to build a retirement industry,” he says.
A quarter of the country’s population will be 60 or older by 2030. Unfavorable demographic trends are creating strains on the state-funded pension system, so the development of private provision is an urgent priority. The finance ministry will begin a pilot program in May that will mark the start of a private pension system for individual savers.
“We see this as a very interesting area,” says Lo, who adds that Invesco is recruiting more staff for its WFOE operations and Great Wall Securities joint venture. UBS is also paying attention to pension reforms. “The pension market is not currently open to foreign players but we expect that to change over time,” says Buehlmann. He adds that only about half of retirement savings are professionally managed but this will increase significantly as the pensions industry matures.
Z-Ben Advisors, the Shanghai consultancy, warns that UBS, Schroders and Invesco, along with BlackRock and JPMorgan, are pulling away from their competitors in the race to expand their presence in China. Peter Alexander, Z-Ben managing director, says too many international managers continue to ignore clear signals by Chinese policymakers.
“They remain more focused on discussing internally what to do about China rather than actually making a decision,” he says, adding that this will have far-reaching consequences. “Expect in a year’s time for a number of global managers to ask themselves, ‘Who lost China?’” says Alexander.
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