Foreign and domestic asset managers in China are weighing how best to respond to a recent rule change that allows offshore players to take full ownership of local fund operations.
For foreign players, the key question is whether to take full control of existing joint ventures, set up their own operation or stick with or establish new JVs. Meanwhile domestic players must decide whether to keep playing in a developing industry or team up with or sell out to wealthy foreign rivals.
On April 1 Chinese authorities removed restrictions that prevented local asset managers and securities companies from being fully foreign owned, as part of efforts to boost the financial sector following the impact of Covid-19 over the first months of the year.
JP Morgan was first to react, moving decisively on April 3 to buy the remaining 49% of its joint asset management venture with Shanghai International Trust. Other major foreign players such as BlackRock, Morgan Stanley, Goldman Sachs, Neuberger Berman, Amundi, Fidelity and Schroders are also believed to planning local operations, dispelling any suggestions that the pandemic would halt market development.
“China’s leaders see the pandemic as a loss of face and they want to mobilise key areas of the economy. That’s why they have moved fast in opening up financial services,” Peter Alexander, principal at Shanghai-based consultancy Z-Ben Advisors, told AsianInvestor.
Foreign fund manager interest in bigger China operations is understandable. The country is set to become a greater component of foreign institutional portfolios as global index providers such as MSCI, Standard & Poor’s and FTSE increase it in their weightings, while auditor and management consultancy KPMG predicts China’s asset management market will become the world’s second-largest by 2025.
Still, experts foresee JV buyouts to be rare. Yoon Ng, Singapore-based senior director of Apac Insights at research firm Broadridge, told AsianInvestor that current valuations were sky-high and thus out of reach for many foreign institutions.
JP Morgan is reckoned to have paid between $800 million and $1 billion to secure its 100% stake. Morgan Stanley is the only other financial group to have paid for majority control of a relatively small JV.
Foreign players in would also need local JV partners to sell. Zhang Howhow, partner of the global strategy group at KPMG in China, believes some could do so.
“Some of the Chinese partners still owning 51% might be more open-minded towards other forms of strategic partnership,” he told AsianInvestor. In cases where current partnership has lacked synergy, or the parties are not “entirely happy,” they will weigh that against other options, “taking into consideration that the market is now developing very quickly”.
Chinese lenders such as Bank of China have asset management divisions but have also been expanding into wealth management. This offers a potential alternative gateway into retail investment. “With a wealth management subsidiary, their stake in a mutual fund company is not as exclusive as it used to be,” said Zhang.
However, Stewart Aldcroft, managing director of Cititrust in Hong Kong, thinks it unlikely Chinese owners of joint ventures will initiate divestments.
"Many prefer to keep the status quo as these ventures are very profitable these days," he said. "Further, it is generally believed where the Chinese owner is an SOE [state-owned enterprise] or municipality-owned business, these are unlikely, unwilling and in some instances incapable of selling.”
Another option under the relaxed rules is for foreign fund houses to create a fully-owned local businesses.
BlackRock and Neuberger Berman were the first to apply for a fund management licence at the start of April. Others, including Fidelity and Schroders, have applications in the pipeline. BlackRock also has an agreement with CCB and Singapore sovereign investor GIC to develop a fund management business in China. However, no details have been forthcoming.
Establishing a new business comes with its own pros and cons. “Setting up fully-owned fund management companies will give foreign managers full control of a business, but such ventures require significant paid-in capital, personnel costs, brand building, and establishing distribution networks,” said Ng.
Another route is to set up investment advisory joint ventures with local financial groups, such as Vanguard’s deal with Ant Financial. In December 2019 the US fund manager took a 49% stake of a joint venture with the Chinese financial technology company to provide a fund investment advisory service to Chinese investors.
The downside of this approach is Vanguard’s lack of control. “Ant is not going to be exclusive with any one company,” said Alexander.
Similarly, Ng noted that investment advisory JVs with banks are unlikely to give offshore managers exclusivity in their product distribution.
“Having a bank wealth management subsidiary licence is useful, but you either need to have an affiliated parent or form a JV with another bank subsidiary, as Amundi has done with Bank of China,” she said. “In these cases, forming JVs with the top banks will be key, but it should also be recognised that they will equally be receptive to selling other third-party managers’ products.”
Plus, JV commitments are “next to impossible” to break, according to Alexander. “Russell Investments and Ping An did the exact same thing in 2011, and that got disbanded in 2015.”
While foreign groups mull how best to expand in China, Alexander believes they can compete in terms of offering high quality products. This is particularly the case for pension products, a market that has yet to take off in China.
“Chinese asset managers are bloated and inefficient – there’s not a lot of innovation at the product level. There are so many ways that a foreign firm could come in and compete effectively, not only to build the scale of a business but really gain market share.”