Now is the time for foreign managers to target China, with deregulation forecast to underpin a tripling of the asset management industry and rising numbers of institutions eager to diversify.

That’s the view of Shanghai-based consultancy Z-Ben Advisors, which today co-publishes a report with Citi Transaction Services (CTS) entitled China: The world’s best opportunity for asset managers.

Z-Ben predicts that the AUM of China’s fund management industry will swell to Rmb6.8 trillion ($1.07 trillion) within three years to the end of 2015, from Rmb2.3 trillion today.

This forecast leap is attributed to better fund performance from improved market conditions, retail inflows on the back of that and a broadening of China’s institutional market, with smaller players including insurers and pension funds making debuts.

It is also backed by anticipation of further deregulation, which will grant greater flexibility to domestic fund management firms and enlarge the investment scope of institutional investors.

Already fund managers have seen the range of financial instruments they are permitted to utilise expand, including the use of futures for segregated accounts. What’s more, insurers will be soon allowed to issue mandates to FMCs.

Regulators have recently made big changes to market development programmes, allowing foreign participants ever-greater scope in operations. The formal programmes for cross-border investment – QFII, RQFII and QDII –– have all been expanded dramatically over the past year.

“In the coming decade Greater China will no longer be viewed simply as an element of emerging market exposure, but rather as a distinct asset class, with Chinese A-share investments making up a significant part of this allocation,” finds the report.

Against this backdrop, foreign firms are urged to enter China directly to capture the opportunity. Stewart Aldcroft, senior adviser to CTS in Asia-Pacific, notes that the JV structure is not an ideal approach to explore China’s market as “JVs don’t usually last longer than 20 years”. 

In fact, among the top 10 FMCs in China, only three are JVs with foreign partners as minority shareholders.

"Overseas financial firms can now complement their representative offices with wholly foreign-owned enterprises (WFOEs), 100%-owned businesses offering enormous operational flexibility and the opportunity to take a direct role in China’s ongoing internationalisation of capital flows,” says Peter Alexander, managing director of Z-Ben Advisors.

With hands-on experience in China, Aldcroft believes that WFOEs can develop advisory businesses to help international asset managers win mandates from large Chinese institutional investors such as CIC, which is about to review its first batch of external managers.

He predicts the foreign institutions most likely to set up WFOEs in China will be global asset management companies which don’t already have a JV or fund management business in China.

While domestic banks will remain the dominant distribution channel for mutual funds in China, foreign banks are also expected to become fund distributors in the near-future, even though they will find it difficult to penetrate the domestic market.

“By the end of this year, three or four foreign banks are likely to start onshore distribution business in China,” says Aldcroft. “Foreign banks will not compete directly with the big four domestic banks, but target high-net-worth clients in big cities and offer them products and services of global standards.”

Early entrants into China such as HSBC, Citi, Bank of East Asia and Standard Chartered are mostly likely in the first batch, he predicts.

Foreign banks will bring a change in style of selling funds and providing financial advisory services, adds Aldcroft, which should help the fund management industry to soar.