China has been on a reform tear in its onshore fund management industry, allowing international players access in an effort to broaden out the sort of products on offer.
Yet for all these efforts to cut red tape, several challenges remain. Top of the list for global fund houses is China’s opaque regulatory processes.
The country’s regulators are inscrutable, offering little certainty over how long it will take a fund house to gain a fund licence or quota approval. In part this is because their decisions hinge on broader economic issues, an unnamed Shanghai-based analyst told AsianInvestor.
This flexibility allowed the regulator to react faster to changes in market conditions, but the unpredictability and potential for seemingly arbitrary decisions leave foreign fund managers uneasy.
Ian Macdonald, deputy head of Asia Pacific, Aberdeen Standard Investments, believes the process for a Wfoe to become a FMC may not become clearer for a while. “The potential prospect of building a mutual fund business onshore is exciting, [though] it may take some time for the regulators to further shape the policy and develop clear guidelines,” he told AsianInvestor.
BEA Union believes the heart of the problem lies with the fragmented and decentralised responsibilities of the watchdogs that oversee the country’s regulatory regime.
“There has not been a set of ways to do things in the past couple of years. In mainland China different regulators approve different things,” said Rex Lo, managing director of business development at BEA Union Investment Management in Hong Kong.
In overseas countries, a single regulator is usually responsible for the approval process of funds, such as the Securities and Futures Commission in Hong Kong. In mainland China it’s not so simple. The China Securities Regulatory Commission oversees mutual fund business, Amac regulates private funds, while the municipal financial regulatory bureau approves IM Wfoes.
BEA Union submitted the PFM license registration material with Amac in December 2018, but is still awaiting approval. Lo said the firm has had to submit more materials to the regulator following the introduction of the unified asset management rules in that year.
IM Wfoes are eager to get PFM, qualified domestic limited partner or investment advisory licences as quickly as possible so they can build asset bases and start to make some money. The fact some have to wait a long time will be difficult for fund houses that don’t have the support of a global business – even if the growth potential in China is large.
Aspiring China market entrants also face mounting competition from a broadening array of local competitors.
Lo of BEA Union noted that more banks and insurers are setting up fund management divisions to manage the assets of their parent companies. That makes it harder for global players to obtain investment mandates from asset owners, more difficult to build local teams in the country, and means there are more potential rivals for external assets as well.
Finding quality personnel is a particular problem. Global fund houses require trained staff in the front, middle and back offices as they expand in China. Typically it takes at least two dozen staff members to set up a Chinese FMC, and most need to be of a senior or at least middle-senior level, due to the high importance attached to professional qualifications and backgrounds, estimated HKIFA’s Wong.
As a result the competition for the best local talent will intensify as the industry grows, she noted.
Regulators are trying to address the problem. Amac said in August that it will offer qualification exams in English in addition to Chinese, to allow more international experts to enter the China market and work for Wfoes.
Another consideration relates to distribution. While digital fund selling is growing, fund houses still primarily rely on banks to distribute funds. Foreign fund firms will have to work hard to demonstrate themselves to get onto the bank shelves, especially when the top five or six banks are responsible for the lion’s share of fund sales, said Wong.
That’s not an easy prospect for foreign fund managers, particularly given that they primarily have to use onshore assets for their funds, said Macdonald of Aberdeen Standard.
Foreign firms need to quickly launch domestic strategies and begin building the long-term track records that are a pre-requisite to access certain market segments and clients, he added.
For foreign fund managers the opportunities in China are tremendous. But the rewards won’t come quickly, or easily. They need to build local knowledge; find and hire talented individuals; and understand the needs, culture and investment practices of local clients, Janet Li, wealth business leader for Asia at Mercer, told AsianInvestor.
The firms also have to meld their professional and quality investment philosophies with domestic market insights and needs. All of this will take time – for foreign fund houses to deepen their knowledge and smooth out their operations, and for the China’s investor population to embrace the foreign brands.
“Their participation is a long-term development. Don’t expect instant returns in the first three to five years. It could take longer,” said Stewart Aldcroft, senior adviser at Citi. “Patience is everything in the China market.”
This article was adapted from a feature that originally appeared in AsianInvestor's Summer 2019 magazine.