China fund subsidiaries eye ABS market growth

The segregated account units of domestic fund houses see new revenue opportunities in a slow-moving market after the regulator permitted them to offer asset-backed securities.
China fund subsidiaries eye ABS market growth

Chinese fund houses are striving to capitalise on recent liberalisation allowing their segregated account subsidiaries to launch asset-backed securities (ABS).

These units were given the go-ahead to sell ABS last November by the China Securities Regulatory Commission (CSRC), under the administrative auspices of the Asset Management Association of China (Amac).

Amid slow growth in the domestic mutual fund market, this is seen as a new source of revenue by  managers operating segregated accounts under their subsidiaries, which have less onerous risk restrictions.

While China's fund industry saw asset growth of 52% last year, its highest pace in seven years, that was mainly contributed by money-market funds and remains way below the 2006-08 peak.

“It [ABS liberalisation] is a big piece of cake to us,” said Leon Liang, CEO of Guotai Yuanxin, a subsidiary of Guotai Asset Management, which focuses on segregated account business.

With liquidity tight in China – the central bank has been reluctant to loosen monetary policy and banks are not being encouraged to lend – Liang sees securitisation of bank loans and company assets as a way to generate new capital.

He estimates the total size of Chinese bank loans at around Rmb100 trillion ($16.1 trillion), underlining the potential for a sizable ABS market if only a small percentage was securitised.

To develop ABS business, Guotai Yuanxin said it planned to collaborate with small banks; large to medium-sized lenders in China would tend to have their own asset management subsidiaries and would be able to securitise loans themselves.

While Guotai Yuanxin has not yet set a launch date for its first ABS product, China AMC Capital Management, a subsidiary of China’s second-largest fund house China AMC, became the first such subsidiary to launch an ABS product on December 16.

This product is backed by the private equity fund run by Citic Securities’ direct investment arm, Goldstone Investment, which bought 11 Suning Appliance stores for Rmb4 billion last October. Citic Securities has a 62% stake in China AMC.

While trust companies have been allowed to sell ABS products since 2005 under the China Banking Regulatory Commission (CBRC), the difference this time is that the authorisation and administrative set-up under Amac is intended to be simple, flexible and more efficient.

Liang noted how ABS approvals under the CBRC had taken a long time because they were required to comply with stricter standards than under the new Amac regime.

But despite the ABS liberalisation, Liang said many fund subsidiaries had been focusing their efforts on so-called channel business. This involves subsidiaries helping asset owners to launch segregated products without acting as a distributor.

Liang said growth in this segment was strong, but profit margins were low. In contrast, Guotai Yuanxin aims to act as an asset manager with the capability of both developing and distributing products.

Cao Zhan Qing, analyst at Beijing-based third-party distributor Gesafe Wealth Advisory, noted that about 90% of fund house subsidiaries focus on channel business, while only 10% of them concentrate on asset management.

Guotai Yuanxin has established three product lines: private debt financing, merger and acquisition funds and absolute return segregated accounts.

The firm targets high-end private clients and institutions such as banks and insurers since the CSRC requires investors to make a minimum investment of Rmb1 million, while a single segregated account product’s size must more than Rmb30 million but allow a maximum of 200 investors.

In September 2012, the CSRC allowed fund houses to establish subsidiaries to expand segregated account business to tap private wealth.

According to the CSRC, 40 subsidiaries managed Rmb1.4 trillion as of March 2014, while 70 subsidiaries managed Rmb2.3 trillion as of August that year, representing growth of 67%.

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