The Dutch pension asset manager's Asia Pacific head of real estate says his team has just had one of its busiest years ever and that 2021 is looking similarly promising.
Foreign banks in China have been allowed to sell offshore mutual funds to mainland investors since August 2007, an extension of the China Banking Regulatory CommissionÆs (CBRC) expansion of the qualified domestic institutional investor (QDII) programme; last spring the CBRC gave domestic commercial banks the green light to include Hong Kong-authorised mutual funds in their QDII offerings.
Since then Citi, HSBC and Standard Chartered have rolled out series of global funds to mainland investors. This is part of their budding wealth-management services, which only began last year in the wake of China meeting its commitment under the World Trade Organisation accession agreement to let foreign banks operate onshore.
These wealth-management services, aimed at ChinaÆs growing ranks of affluent, can sell nearly the full range of products, including renminbi-denominated deposits, credit cards, structured notes, and unit-linked investments, along with offshore funds. From a product perspective, the missing link is domestic mutual funds, which remain out of bounds.
Bank executives say they believe they may gain licences to sell domestic funds by the end of the year. Such timetables are never transparent but they say regulators are working proactively to allow this to happen.
The timing may depend on global markets, however, and authorities' desire to make a success of QDII.
Demand for QDII has plummeted this year, as the subprime mortgage-derived credit crisis has roiled global stockmarkets, leading the first three QDII funds issued last year to lose up to 30% of their value. ICBC Credit Suisse Asset Management launched the fourth equity-focused QDII product in February but it raised only $450 million, compared to the (heavily oversubscribed) $4 billion to $5 billion QDII funds launched in autumn last year. If global markets stabilise and demand for QDII products recovers (or if demand for A-share funds declines) then foreign banks may win licences to sell local products sooner.
Domestic banks would naturally frown upon seeing foreigners eat into their own growing wealth-management businesses and may be trying to stall any such opening. But distribution officers at domestic fund management companies say they would welcome the chance to see how banks from mature international markets go about the process of product selection; it would be a chance for some domestic houses to differentiate themselves and improve their game.
But for executives at foreign banks, the ability to sell domestic funds is not an end in itself. Rather they are looking at a bigger prize: the ability to provide custody to local fund assets. ôToday we provide custody for offshore funds,ö says one banker in Shanghai. ôOnce we can sell local funds, custody may follow.ö
Custody is a lucrative game in ChinaÆs fund market, bringing in around 25 basis points, and in some cases up to 50bp, on assets being serviced û far more than the 2bp to 3bps earned in most jurisdictions. It is also riskier, as master custodians are the fiduciaries and must invest heavily in areas such as compliance.
But executives at fund management companies in Shanghai are sceptical the CBRC will allow foreign banks into domestic custody soon. They note the difference between selling domestic funds, in which banks would see the investment flows, versus actually keeping the assets. This is a political issue that would require the State CouncilÆs approval, which probably requires government-to-government horse-trading.
Even if foreign banks do get the chance to sell domestic funds, they face a major hurdle: lack of a national network. A foreign bank has dozens of branches; the big-four state-owned commercial banks boast tens of thousands. The licensing process for foreign banks is slow, effectively one city per year, with later permission to open sub-branches in those approved cities.
Lastly, even at this stately pace of expansion, foreign banks struggle to find enough qualified staff û people with a few years of relevant experience. They are training fresh recruits, which are plentiful, but wealth management requires more than just teller skills. As the China Banking Regulatory Commission has yet to pronounce on this issue, the foreign banks may have plenty of time to build those teams.
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