Chiang Hsien's business card indicates he works for "Guotai Junan Allianz Fund Management Co., Ltd. (Preparatory)". It's the last word that says the most. Chiang is the CEO-in-waiting for China's first approved Sino-foreign fund management joint venture company, but the license just granted by the regulators is not to conduct business. It is approval to set up the infrastructure and personnel for a business, subject to further approval by the China Securities Regulatory Commission.

The CSRC has granted the application by Guotai Junan Securities and Allianz Dresdner Asset Management (or "Adam", which entered via its recent acquisition, Dresdner RCM Global Investors) to form the JV to manufacture, market and manage domestic mutual funds, with Guotai Junan owning 67% and Allianz owning the maximum allowed to a foreign party, 33%.

Chiang says Allianz will negotiate to increase its stake to 49% in three years when allowed under World Trade Organization rules with China.

Now the two owners must satisfy a laundry list of requirements highlighted by the CSRC in order to obtain an operating license. Although the JV has up to 12 months to do so, Chiang and other Allianz officials believe they could obtain approval by January, and launch their first mutual funds (each product requires a separate license) by March or April. The reason for this optimism is that the whole process of gaining the preparatory license has occurred faster than expected.

Bruce Kho, Adam's Asia Pacific CEO, says the first priority is recruiting. Guotai Junan has the right to appoint a chairman, whose name has not been publicized yet, while Adam has forwarded Chiang as CEO.

Chiang, a Beijing native, joined Dresdner in 1992 after studying in Germany and in 1996 moved to Hong Kong to market asset management to institutions. In 2000 he headed its Taiwan business. His appointment as the JV's CEO still needs official board of directors approval but is agreed with Guotai Junan.

Other positions still to be filled include CIO, COO, chief marketing officer and, directly under Chiang, a head of compliance and risk management. Kho says most of these senior positions will come from either the Guotai Junan or Adam organizations.

Mark Konyn, Adam's chief marketing officer in Asia Pacific, notes that Allianz Dresdner has the investment expertise, while Guotai Junan brings heavy marketing power.

By the time the JV is ready to launch its first fund, however, it will need up to 60 people, and many of these will have to be found from the market in Shanghai, where it is based, and other parts of China.

The next priority is setting up the JV's IT infrastructure and software systems for its front, middle and back offices. Here a key decision has yet to be made: whether to outsource some or all of this functionality - and if yes, to whom.

Chiang notes that to build all of this itself is a Rmb20-30 million job that would take up to six months - in other words, expensive and time-consuming. Outsourcing would be ideal. Until now, however, the only option has been to let one of the major commercial banks do it.

There is a new quasi-state-owned enterprise, however, that has appeared on the scene: the Central Registration Company, which has branches in Beijing, Shanghai and Shenzhen. Every financial institution has an account there but, says Chiang, "No one has tried it. But new fund companies may," given the start-up costs they face.

If using the Central Registration Company is a risk, then outsourcing to banks can sometimes create conflicts of interest if a fund management company uses several as distributors. A bank handling fund admin and custody may object to having a competitor bank selling the underlying assets.

"The sensible way to start is to determine what are the client's service demands," Chiang says, noting that the JV will have to make a decision soon.

Once the preparatory business gives way to a full-blown operating license, the next business challenges will include branding, and expanding the investor base away from retail.

Konyn points out that all mutual funds are required to hold at least 20% in fixed income, and that without much of a credit market and no access to derivatives, there is little differentiation outside of equity styles. "What will be critical is the fund's reputation," he says. He thinks Guotai Junan Allianz can distinguish itself with a focus on risk management and international investment methods.

The other issue is discretionary asset management, which since the fund management industry was reorganized in 1997 is prohibited. But the National Council for Social Security Fund, which is China's nascent fully funded pension scheme, has announced in its selection process that it will consider mutual fund companies. This is a legal contradiction that fund managers hope will be resolved in their favour over the coming months.

Insurance companies are also eager to invest directly in the market. This could take away business, if they can invest themselves, but would also give professional money managers the opportunity to pitch discretionary mandates to insurance firms.

Last, insurers now provide big mandates to securities firms directly, to be managed by prop desks. Chiang says the regulations may be altered in 2003 to either allow insurers to give discretionary mandates to fund managers, or consolidate the asset management activities of securities houses into their affiliated fund management companies.