On 16 October, ING Investment Management and Shenzhen-based China Communications Securities (CCS) signed a technical cooperation agreement for the establishment of a new fund management company in China. Chris Ryan, ING's regional director for North Asia, explains.
FinanceAsia: Who owns CCS?
Chris Ryan: It's partially owned by China Merchants Bank. Other parts of ING's business have exposure to the bank but we have no other business arrangements.
What do you hope to get out of this relationship?
We're looking for the potential to participate in China's fund management industry. The final regulations are still being written. They should be released some time after China joins the World Trade Organization, but we understand the regulators have been in discussions with the industry about this. They [the China Securities Regulatory Commission] are considering various alternatives.
I thought the WTO agreement spelt out how much a foreigner could own in a fund management JV and over what period of time.
The WTO rules are not a commitment, but they are a good gauge to understand how the authorities are thinking. This relationship with CCS will also be subject to our performance and their performance under the terms of our technical agreement. ING needs to learn more about the funds industry in China. We have been looking at what our competitors have done and we see a wide range of experiences.
We hope to have a strong relationship that develops into a partnership. Some competitors have gone in only as technical or financial advisors. Others have taken a more creative and comprehensive approach, such as HSBC with China Southern and Huaan [which has a relationship with JF Asset Management]. There are different models, different levels of quality of relationships and levels of engagement. We want to be as engaged as possible. What we've found is that the China fund market is not simple. It is complex. Nor is there an endless supply of money entering funds. Some of our competitors have gone in too rushed.
Is the success of Huaan's open-ended mutual fund a pattern or a one-off?
It is not a one-off. The critical issues for a foreign partner include the level of engagement, what we are willing to provide, and distribution. Distribution is still a pretty new element. There are only two open-ended funds, and distribution will develop into a more customer-oriented way. We have seen fund management companies' plans for call centres, customer fulfilment centres. This indicates they are planning for a reasonably sized industry. I think closed-ended funds will also continue to serve a purpose. They've been a success and will be around for some time.
Why partner with a securities company and not a fund manager?
We needed to define what companies were a good fit for ING, in terms of their ownership structure, distribution, do these people have a good understanding of and access to distribution. It came down to the quality of the organization backing the company, the quality of its access to distribution, the quality of its people. The people at CCS have the right experience.
Any time a foreign firm makes a relationship with a domestic firm there are things in the established business you would want to change. No one expects the fund management JV we want to establish to mirror an international firm, but it needs certain basic things. We've found in CCS a good understanding of the fundamentals, such as the infrastructure for risk management, an emphasis on product development and product cycles û meaning they know how to get customers and how to keep them. CCS also has the resources to fund the growth of a fund management business in an environment that will only become more competitive; oversubscriptions will be a long gone dream.
Are you involved directly with CCS as a securities company?
We are not advising them on their securities business. CCS is applying to the CSRC for a license to establish a fund management company: that is our initial task. It involves the establishment of all the basic disciplines and resources. You must understand CSRC regulations and match these with international standards. It is the role of the international advisor to make those standards to be as internationally competitive as the existing regulations allow.
There is no difference between dealing with a securities company and a fund manager. All the fund management companies have securities houses as shareholders, and some securities firms have stakes in more than one fund management company. A securities company's past performance determines whether it gets approval to enter a new industry û like in any country. We understand CCS has a strong compliance record.
How long have you been in talks with CCS?
We have had connections with members of the group for a long time, but talks about this agreement began about four months ago. I think one of the things they wanted in a partner was a strong parent. ING has over Eu500 billion under management. We are global; we manage money in 28 different markets. And we have a lot of experience with joint ventures. We are very comfortable with JVs, as our presence in Korea, Taiwan, Singapore and other countries shows.
When do you expect CCS to get approval to establish a fund management arm?
Maybe by the middle of next year.
Is this for open-ended funds, closed-ended funds, or other products?
The business plan you submit to the regulator has to include what types of funds you want to offer. We are now discussing this with CCS. All options are on the table.