Foreign banks are preparing to apply for licences to distribute domestic mutual funds in China and become fund custodians for the first time, although pending a regulatory update few want to talk about it.
An agreement was struck between Chinese and US financial authorities at the Beijing Strategic and Economic Dialogue last Wednesday, paving the way for foreign banks to be allowed to sell domestic mutual funds in China.
“We have got the internal human resources and infrastructure ready for the mutual fund distribution business and look forward to the regulatory update to accept our application for the licence,” says Percy Chan, general manager of wealth management in China for Bank of East Asia.
Dorothy Kwan, vice-chairman of Hang Seng China, also voices enthusiasm for the mutual fund business. “Currently most wealth management products we offer in China are conservative capital guaranteed structured products. Mutual funds will be another important element to the product suite.”
She says Hang Seng Bank has not done much specific preparation work since no formal announcement from the regulator has been issued yet. “What is still unknown is how due diligence, system and procedures support, conciliation, clearing and settlement will be done,” she notes.
With global expertise in mutual funds, Citi tells AsianInvestor that it too welcomes the ability to conduct mutual fund business in China, subject to regulatory approval, without elaborating.
And several foreign banks contacted by AsianInvestor, including HSBC and Standard Chartered, say they are also keen for the opportunity to materialise, but declined to comment further until regulatory details are announced.
Mutual fund distribution in China has been a business that foreign banks have been eager to get into and will be a valuable source of income, given that this can be a lucrative business offering front- and back-end fee loads, along with an annual trail.
According to the data of TX Investment, 243 mutual funds from 21 fund management companies (FMCs) paid 16% of management fees to banks as annual trail in 2010.
Chan of Bank of East Asia notes that in anticipation of a regulatory update the firm has prepared internally and that some staff have already passed the requisite exams.
Consultancy Z-Ben Advisors suggests the timeframe for regulatory guidance on opening the fund sales business to foreign banks will be anything between six weeks and six months.
Major banking distribution channels have become increasingly crowded since the regulatory approvals process for new funds was relaxed last year. Instead of submitting one fund application at a time, FMCs can now submit up to six products in different categories (equity, fixed-income, money-market, balanced, QDII and index) simultaneously.
Up to May 9, a total of 63 new funds had been established this year and a further 22 are under IPO fundraising. Hence, the availability of an additional distribution channel is good news for FMCs.
Tian Rencan, CEO of HFT Investment Management, says: “We have been talking to foreign banks all the time and we welcome any new distributor.”
He adds: “Even though foreign banks’ coverage and presence in China is still not comparable to their local competitors, they have a unique customer segment of high-end wealthy customers, which is different from traditional Chinese banks. This segment is very interesting to us.”
Francois Guilloux, Shanghai-based director of regional sales at Z-Ben, believes that foreign banks in China can really shine by delivering superior customer service to fund buyers, which is a task at which Chinese banks “have thus far failed”.
Tian acknowledges this: “Generally speaking, foreign banks are more aware of the growing importance on the customer-servicing side. Their experience elsewhere shows that over the long run, the competition will narrow down [to providing a] quality package of services.”
BEA China’s wealth management department consists of research and advisory teams, with regional investment advisers based in Shanghai, Beijing and Shenzhen taking care of customers at more than 90 branches countrywide.
“We are not trying to build a supermarket of financial products but offer value-added services according to individual customer’s risk profile and time horizon,” says Chan. “Our wealth management team offers customer services that follow the guidelines of asset allocation, investment opportunities and financial planning.”