A French Revolution may be occurring in the Chinese funds industry, where the impending mergers of BNP Paribas with Fortis Investments, and SG Asset Management with Credit Agricole Asset Management, are raising new issues about who can own domestic fund management companies and the ability of Chinese regulators to keep pace with global developments.

The China Securities Regulatory Commission (CSRC) has a well understood, if unwritten, policy known as "1+1". This means any domestic entity may own up to one majority and one minority stake in different fund houses. For foreign players, the understanding is to limit them to a single minority stake.

Industry executives, consultants and lawyers say the CSRC intends to maintain this informal rule.

There is a precedent for this. China Asset Management merged with Citic Funds, a move that was prompted by the CSRC to ensure ChinaAMC's owners conformed to the 1+1 rule.

This was achieved smoothly but over a period of three years, including painstaking work to get investors across China to vote their approval on basic matters such as corporate name changes or switching portfolio managers.

But now a spate of mergers between foreign fund managers around the globe is testing the government's 1+1 decree to its limits.

When Fortis Group acquired parts of ABN Amro, including ABN's asset management business, both had existing JVs in China. Fortis was forced to jettison its 49% stake in ABN Amro Teda Fund Management in favour of maintaining its own JV with Haitong Securities.

Old Mutual won the bid for the Teda business, reportedly beating competitors including Mirae Asset, RBC Dexia and State Street with an expensive €165 million bid in August 2008.

But there has since appeared a wrinkle: Julian Roberts, CEO of Old Mutual, announced his intention to scale back the firm's expansion into Asia. Old Mutual has therefore agreed to pay a huge €45 million penalty in order to exit the deal (at a time when China's equity markets are soaring, boosting fund house revenues).

Fund execs in Beijing and Shanghai suspect this twist has more to do with Old Mutual's financial health than with prospects for the Chinese funds industry. Old Mutual's exit may have been delayed by Fortis Group's own scuttled deal with Ping An Group, which last year had sought to acquire 50% of Fortis Investments but retreated when Fortis faced partial nationalisation in Belgium.

Fortis, which would like to simply wash its hands of all of this, is still in charge of the Teda funds JV. And Fortis has been acquired by BNP Paribas. This is taking place at the same time that SGAM and CAAM are in a merger deal driven out of Paris.

BNP Paribas is technically in breach of the 1+1 rule, given its 33% stake in SYWG BNP Paribas Asset Management, its 49% stake it will inherit in Fortis Haitong, and with the exit of Old Mutual, now another 49% stake in ABN Amro Teda.

Meanwhile, separately, SGAM owns 49% in Fortune SGAM, and CAAM has a 33.3% stake in a JV with Agricultural Bank of China, among the newest joint ventures in the industry.

In the BNP Paribas case, there is nothing its executives can do immediately. The ideal outcome would be some sort of merger, but given the various counterparts involved, this seems unrealistic. None of the various Chinese partners would want to see their controlling stake in a smaller JV diluted into a minority stake in a bigger one.

BNP Paribas insiders say a working group to implement the Fortis merger at the group level is only getting started sometime in June. It needs to decide which two of its three JVs to sell. As a foreigner, there is no guarantee it will be given the time, flexibility and support shown to ChinaAMC during its digestion of Citic Funds.

As at the end of the first quarter, Fortis Haitong is the biggest among the three: it is the 22nd largest fund house in the industry, with Rmb35.61 billion under management. According to Z-Ben's benchmarking metrics, it ranks at 15 among all JVs on overall quality. ABN Amro Teda scores the 32nd place with Rmb20.74 billion in AUM; Z-Ben reckons it stacks up at 17th. Over the same period, SYWG BNPP is a dismal 40th, with Rmb11.51 billion in AUM, and is the 20th best player, out of a total of 32 Sino-foreign JVs.

Fewer foreign institutions now have the capability to buy into the companies at valuations Chinese shareholders command. Now that the market knows €45 million was paid for the exit out of ABN Amro Teda, most will automatically deduct the sum from the original valuation at €165 million. And then, there is the unfortunate fact that the market knows that BNP Paribas will have to force-sell two companies at the same time, which will naturally further depress the price BNP will be able to command.

If market gossip is to be believed, there have already been expressions of interest from buyers willing to step up to the ABN Amro Teda stake.

Z-Ben's Peter Alexander notes while the company is long regarded as an unwanted child, it has been able to surprise investors time and again with its exceptionally good performance in bear market conditions. Its products had been able to nab positions as best performers in 2004, 2005, and even the past year on an overall relative basis. Even after the noted exits by high-level execs at the end of 2008, the company still boast stable AUM -- a sign of recognition among the investing community of its ability and resilience.

Keeping its own homebred brand SYWG BNPP seems like the obvious option. But that business had been known to suffer from periodic squabbles among the JV senior management, BNP and Shenyin & Wanguo Securities, and the JV's growth hasn't lived up to expectations.

Fortis Haitong, led by the high-profile veteran Tian Rencan, is traditionally deemed to be the most successful of the three, and Tian will fight for operational independence in any settlement.

One possible source of rescue: Taiwan. Thanks to the thaw in cross-strait relations, there are eager Taiwanese buyers, potentially including Polaris Securities Investment Trust and Yuanta Securities Investment Trust. Polaris already partners with Fortis Haitong on ETF initiatives.

Executives and observers reckon all of these players will be forced to comply with the CSRC's 1+1 rule, but wonder to what extent it can be bent, or adapted to the reality of global M&A. The CSRC is expected to face more challenges later this year, as unhappy Chinese shareholders part ways with bankrupt foreign counterparts. There could be plenty more fund JVs up for grabs. For BNP Paribas, SGAM and CAAM, this may not equate to the storming of the Bastille, but they are leading a charge headlong to...where?