In an indication of how early optimism has evaporated, the majority of joint-venture FMCs in China forecast that some foreign firms will exit as the number of domestic players doubles within three years.
At present there are 36 foreign firms engaged in joint-venture fund management in China, and just 26 domestic firms. But a major shift is forecast by 2014, when it is anticipated there will be 45 foreign firms and 50 local companies operating in the sector.
Moreover, 70% of respondents to PwC’s third biennial survey of foreign fund managers in China say they now expect a number of foreign firms to exit the market. At the same time, 19 of 28 respondents think their market share will remain flat over the next three years, in contrast to the 2009 survey when 22 foreign JV companies anticipated growth.
Robert Grome, PwC Asset Management Leader for Asia-Pacific, suspects that the global financial crisis of 2008 is the chief reason behind foreign shareholders pulling out of China in the past few years.
“Some Western financial institutions got into difficulty and had to sell off some of their non-core assets,” Grome told a press briefing in Hong Kong yesterday.
Keith Lie, PwC’s asset management partner for Hong Kong, added that some JV fund management companies in China were not operating at optimal level to generate enough revenue to be “commercially viable”.
“The AUM of some smaller foreign players has not reached the critical mass level to survive in the long term,” he said. “So they may have to make the difficult choice to exit the market.”
In terms of the evaporation in confidence since PwC last carried out its survey, Grome points out: “The regulatory environment remains tough. The distribution network is still dominated by the four major banks and now there are more Chinese players in the market. So it does not come as a surprise that foreign fund houses find it challenging to make an impact in China.”
He also suggested that challenging “chemistry” issues between domestic and foreign shareholders could also trigger a collapse in working relations and a market exit.
In all PwC surveyed senior executives at 30 joint-venture FMCs in China between April and June this year.
As at June, JV fund management companies held a 47% market share by AUM with a total of Rmb1.07 trillion ($168 billion), compared with 53% for the 26 domestic firms at Rmb1.27 trillion. Among the top 10 players, Harvest is the only FMC to have a foreign shareholder (Deutsche Bank).
Aside from better knowledge of local markets, Grome believes first-mover advantage has contributed to the relative success of domestic players. The first batch of domestic FMCs were established in 1998 and 1999, compared with the early 2000s for foreign entrants.
He also suggested foreign shareholders had underestimated the difficulties they would face when entering China’s asset management industry with such high expectations. “What they need is patience and long-term vision to see through their investment with a 10- to 15-year time horizon.”
In terms of the major growth drivers, respondents put forward deregulation, RMB internationalisation and continued relaxation of QDII, QFII and RQFII (Rmb QFII) quotas.