A report by management consultancy McKinsey & Company estimates ChinaÆs asset management industry will top $1.4 trillion of assets in a decade and generate up to $3 billion in annual profits.

According to Shanghai-based principal and report co-author Stephan Binder, McKinseyÆs blockbuster prediction for ChinaÆs mutual fund industry is based on three main factors.

ôThat assets under management are still just 8% of GDP,ö he says. ôThere is some $2 trillion still residing in bank deposits,. There is huge room for growth. And pension funds are starting to outsource more with the National Council for Social Security Fund leading the way.ö

This, the firm argues, will lead to a significant increase in the size and quality of ChinaÆs fund management talent.

ôQualified domestic and foreign institutional investment [QDII/QFII] schemes are making institutions more professional and will increase the size of the talent pool,ö says Joseph Ngai, Hong Kong-based associate principal and joint author of the report. ôMost fund managers now are in their thirties and there is not a whole lot of experience which is consistent with the history of emerging asset management industries.ö

Mainland China's gain need not translate into the sidelining of Hong Kong as a centre for asset management, Ngai adds.

ôThe development of China will help Hong Kong,ö he says. ôWe anticipate QDII will continue to deregulate to allow more asset classes and this is not something pure domestic asset managers can manage.

ôThe more robust the mainland market is the more transferable the skills of Hong Kong managers are. On the capital markets front corporates will still want to tap into the international institutional investor base in Hong Kong. Until China solves the currency convertibility issue, the Hong Kong market will offer credibility, exposure and globalisation opportunities as well as money."

In addition to prompting the search for ChinaÆs ænext generationÆ of asset managers the increasing sophistication of the industry will change how the success of market participants is judged.

ôAt the moment, launching large funds when the market is optimistic is the sign of success," says Ngai. "These funds are not overwhelmingly better than others. Over time the test will become whether you can have an attractive risk/return profile. Insurance and corporate pensions are starting to outsource and have different requirements to the retail market.ö

On thing that will not change, according to the McKinsey report, is the retail-distribution dominance of banks.

ôInvestors trust their banks for investment advice,ö says Hong Kong-based partner Emmanuel Pitsilis. ôIn this market during the 1990s it took 45 minutes to sell a mutual fund to a first buyer. In China it will continue to be the banks that have the capacity to offer this level of advice.ö