AsianInvestor has set out to identify five key hurdles that asset managers need to overcome if they are to enter the winners’ enclosure at the end of Year of the Horse.
This is as much about positioning for future growth as it is about navigating near-term market challenges.
Over the past week or so have been revealing our selections in descending order of importance as we rate them. We picked cost control as our fifth-ranked choice, as reported; our no.4 pick was fundraising and at number three we chose passporting.
For no.2 we have singled out China liberalisation. Understanding the opportunities and anticipating what to expect from the region’s major growth market as it opens up is a challenge that every fund house, domestic and international, can prosper from.
Positioning will be key, although timing market entry is seen as less important given the long-term nature of the opportunity.
Formal programmes for cross-border investment – QFII, RQFII and QDII – have all been expanded, while schemes to encourage pension savings, insurance investment and cooperation between financial firms have been boosted, providing foreign asset managers new business prospects. And then there are new pilot projects in Shanghai.
We sought the views of a wide range of industry professionals including asset management CEOs, portfolio managers, institutional and retail salespeople, distributors, custodians, lawyers, consultants, recruiters and research analysts. Thank you for your input and we welcome your feedback.
2. China liberalisation
It’s time for President Xi Jinping to build on rhetoric from the Communist Party’s Third Plenum last November to implement promised market reforms. Managers need to know what’s happening in China and how (or whether) to play it.
They should understand liberalisation better and have a view on when China’s markets will be fully open. Timing market entry will be less important than positioning via a clear strategy and thoughtful communications.
Outward investment from Chinese insurers and state institutions is possibly a bigger opportunity for fund firms than gaining onshore access through the RQFII and QFII schemes.
But renminbi internationalisation is Beijing’s top priority. Ashmore became the first manager ex-Hong Kong to be granted RQFII status, following on from Pinebridge Investments and HSBC Global Asset Management. The RQFII scheme provides improved repatriation of funds and more flexible investment guidelines than QFII, which Beijing is prioritising for large institutions.
Fund houses targeting onshore business will be mindful that Beijing relaxed the 49% cap on foreign ownership of JVs last August. But all eyes should be on Shanghai, for QDLP developments and the free trade zone (FTZ), which could be the start of something big for fund management.
China plans to use the FTZ as a testing ground for reform and a bilateral investment treaty with the US. Free-trade accounts in the zone will enable qualified individuals to do cross-border securities investing and financing. Foreign individuals can invest in the onshore markets, while foreign firms can issue RMB-denominated bonds onshore.
Financial institutions and corporates can also borrow RMB offshore, although the proceeds cannot be invested in securities or derivatives. As for QDLP, six foreign hedge funds have been granted quota, although the scheme has not been launched officially.
The demand side of the market is uncertain and foreign firms are not rushing to approach the Shanghai Financial Services Office to seek guidance. But while initial quota is restricted to $50 million, this can be seen as the thin end of the wedge for China entry.
The broadening of China’s markets and investment strategy will be a multi-year phenomenon, but managers need to understand regulatory direction and position for change now.