The international arm of Beijing-based Harvest Fund Management has got the first equity funds qualified for the Switzerland-Hong Kong mutual recognition of funds (MRF) scheme, it announced yesterday. But Harvest Global Investments – and other mainland asset managers – have a tough task ahead of them developing this business amid fast-growing competition and a gloomy outlook for China.

Economic growth has been gradually slowing and concerns have been rising about debt levels in the country, as recently noted by both Switzerland’s Bank for International Settlements (BIS) and rating agency Moody's. 

In its annual report on Monday, BIS, known as the ‘central bank of central banks’, pointed to debt levels and other risks in the country and elsewhere in emerging markets as among the early warning indicators of another global financial crisis.

Moreover, Moody’s downgraded China in late May from A1 to Aa3 and changed its outlook for the country to stable from negative. The moves came amid fears that the country's financial position would “erode somewhat over the coming years”. 

So it is not surprising that offshore investors have maintained a healthy level of caution regarding mainland bonds as the onshore market opens, despite the relatively attractive yields offered by renminbi debt.

Meanwhile, European sentiment on mainland stocks is at a particularly low ebb. European (excluding UK) investors have pulled money out of China long-only mutual funds for the seven consecutive quarters to March 31, according to eVestment (see chart below). They withdrew a net $4.5 billion over that time, $615 million in the last quarter alone.

China equity funds: European (ex-UK) investor flows 

Date $ millions
Q1 2015 -259.66
Q2 2015 +883.91
Q3 2015 -1,019.71
Q4 2015 -719.65
Q1 2016 -887.28
Q2 2016 -828.73
Q3 2016 -134.76
Q4 2016 -2.58
Q1 2017 -615.85

Source: eVestment

Even Asia-based institutions that AsianInvestor spoke to this month said they had small allocations to China and did not plan to raise them any time soon. They included Hong Kong’s FWD Insurance, Japan’s Pension Fund Association and Thailand’s Government Pension Fund. The latter had just 1.22% of its $22.4 billion in AUM in mainland securities as of early June.

It seems unlikely then that Swiss investors will rush right away en masse into Harvest’s China equity and Asia frontier strategies, to which they now have access.

Indeed, a Hong Kong-based salesperson at an international custodian bank, said the Swiss-Hong Kong scheme, announced in December last year, would not have a material impact on mainland managers' flows in the short term, as it will take time to develop.

Playing the long game

Of course, these are arguably short- to medium-term concerns for Chinese fund houses looking to raise money from investors globally; they can spend time building familiarity with their brand.

Yet they must contend with the fact that many international asset managers with strong global recognition also run mainland strategies and are expanding their China investment teams, with the help of newly granted licences for wholly foreign-owned enterprises.

And foreign investors are more familiar with the likes of BlackRock, JP Morgan Asset Management and Schroders than with China AMC, Harvest or E Fund. Indeed, mainland firms have privately expressed concern over the threat posed by international players.

So Chinese managers have something of a mountain to climb.

But they have been steadily growing, and the biggest ones – such as China AMC, E Fund and Harvest – have already shown the will and committed capital to expand overseas. And they have started forging partnerships with major foreign players: Harvest with Deutsche Asset Management, E Fund with State Street Global Investors, to name two.

Moreover, as the Chinese investment market steadily institutionalises and imports international best practice along with foreign capital, so will its home-grown firms. 

Let's not forget, the likes of Franklin Templeton and Schroders took decades to reach their current position of strength in Asia. It is still early days for Chinese investment managers expanding overseas: they should not be underestimated.