New China ownership rules “won’t spark foreign inrush”
China’s easing of caps on stakes in domestic asset managers—unveiled with fanfare on Friday (November 10) at the end of US president Donald Trump’s visit to Beijing—is unlikely to spark a huge rush of onshore acquisitions, said industry observers.
The announcement, by China’s vice finance minister, Zhu Guangyao, seemed a major and long-awaited move. It indicated the coming removal of limits on foreign ownership of mainland banks and the raising of the foreign-ownership cap on fund houses to 51% from 49% (and its removal in three years' time).
In addition, foreign firms will soon be allowed to own up to 51% of brokerages (and 100% after five years), and up to 51% of insurers after three years, with the latter limit removed after five years, noted Zhu.
He said the opening was “decisive and its impact “immense”.
However, it may have little real effect on the mainland asset management industry, and even less so in relation to the banking and securities sectors, some market players told AsianInvestor.
Keith Pogson, Hong Kong-based senior partner in the financial services division at EY, said: “I don’t think there’s going to be this massive wave of activity because those who’ve been looking at this for a long time are already in.”
Overseas firms with existing 49% stakes in Chinese fund JVs will likely raise them to 51%, he added. “But if you’re not already in [the market], is this [easing of the limits] going to be a big change?"
Given that offshore firms can now set up a wholly foreign-owned entity, they are unlikely to buy an existing business in China, Pogson noted. “It’s going to be very expensive at this point in time.”
Hard road to success?
Some feel that even foreign players with existing fund JVs may even be wary of taking a majority stake.
“[The easing of the limits] is a milestone for the opening up of the China market, but it is just a symbolic one,” said Iris Pang, Greater China economist at ING Wholesale Bank. “It is unlikely that a lot of foreign companies will rush to be the majority shareholder.
“It is appealing to have the controlling right, but companies are not sure if they know how to operate profitably after taking control,” she added.
In fact, added Pang, even once the cap is removed in the years to come, foreign firms may still be reluctant to enter China without partnering local firms, because of policy and market risks.
One Shanghai-based director of institutional business at a mainland funds JV was equally sceptical: “Foreign banks' development in China has not been good, so it is uncertain whether foreign fund management companies can be successful if they own a majority stake.”
Next steps
Certainly, mainland asset managers often gain more than their foreign partners from cross-border JVs, in the form of knowledge and technology transfer, noted Justin Ong, asset and wealth management practice leader for Asia Pacific at PwC. “The joint-venture model of the past has been largely unsuccessful—at least from an international asset manager's perspective.”
BNY Mellon and State Street Global Advisors sold their stakes in their China fund management JVs in 2014, as did Russell Investments in 2015.
The latest changes should provide a more certain footing for foreign fund firms, but the question is when? Pogson said: “I think we’ve got a long way to go before we have clarity in the rules as to what this actually means [for asset managers].”
Beijing has not yet published details of the new rules nor the specific time frame as to when they will be implemented. Zhu said this would not take too long because President Xi Jinping put a focus on greater market access during the 19th Party Congress last month.
The next part of this article will appear in the coming days and will assess the benefits of China’s ownership rule changes for overseas fund houses.
Ernest Chan, Jolie Ho, Joe Marsh and Richard Morrow contributed to this article.