Though foreign asset managers have been entering China through several channels, institutional business development has been slow there, argues Elvin Yu, head of institutional business at Allianz Global Investors.
“Institutional business is less busy and less exciting than the retail and private bank business in China,” he said at AsianInvestor’s Art of Asset Management conference last week.
Several factors have held back industry growth, says Yu, and other panelists agreed.
The National Council for Social Security Fund (NCSSF) first issued mandates only in 2006, and it wasn’t until 2012 that domestic insurers were permitted to invest in foreign assets.
The lack of regulatory clarity has confused managers. Fund managers say the latest offshore investment guidelines, updated in the fourth quarter of 2012, lack detail.
Institutional investors face several hurdles in China, including the different outlooks of offshore and onshore investors, protracted negotiations with local government and regulators, and lack of finance industry infrastructure, says Mona Chung, chief investment officer at CIFM Asset Management (HK), the Hong Kong subsidiary of JP Morgan’s Chinese funds JV.
Another hurdle is competition.
Though Chinese asset owners are looking to diversify overseas, foreign fund managers need to differentiate themselves from their many peers, says Chung.
“You are literally competing against everyone all over the world,” notes Yu, recalling that he encountered a long queue of foreign visitors when he arrived at China Investment Corporation.
Beyond competition and fuzzy regulation, managers have set their sights on renminbi liberalisation, which – when it comes – they expect to boost demand for their services.
Foreign managers have several options for entering China: joint ventures (JV); the Shanghai Free Trade Zone (FTZ); and the qualified foreign institutional investor (QFII) and renminbi QFII schemes.
They have already been keen on tapping the domestic market by setting up JVs – which Chung sees a good option, but one that takes time.
The Shanghai FTZ, which was formally established this February, has potential but is still in its pilot phase with many details yet to be revealed, she adds.
A boon may come in the form of the mutual recognition scheme, which is expected to be launched later this year, though Chung expects the programme to start slowly.
The other option for accessing China is the Shanghai-Hong Kong Stock Connect programme, which is expected to be launched in October. It may provide upside for stock markets and increase investment opportunities for fund managers.
“I think it is a starting point for high-net-worth individuals and retail investors looking to the Shanghai A-share market from Hong Kong, and for investors from China looking to Hong Kong. Sentiment will improve,” says Chung.
The A-share market has been sluggish of late. Year to date, the benchmark CSI 300 index has dropped about 7.5%.
Chung says retail investor sentiment is still weak in China, but that institutional investors are keener. The A-share market is valued at a price/earnings ratio of 8x, compared with 10x for Hong Kong stocks.