The opportunity for international fund houses to grow their asset bases in Asia is shifting to onshore emerging markets as growth in the offshore centres of Hong Kong and Singapore comes to a standstill, finds Fitch Ratings.

In its Asset Management in East Asia report* published yesterday, the agency notes that the fastest AUM growth has been in the emerging markets of Indonesia, Malaysia and Thailand with CAGRs of 15%, 12% and 10%, respectively, from 2007-11. This compares with just 3% in Singapore and 0% in Hong Kong over the period.

The key exception is China, which saw a -3% decline in this time. Fitch blames this on the nation’s undeveloped fixed-income market, restrictions on foreign participation and competition from wealth management products (WMPs) among different players.

But as the agency noted: “A stabilisation/rise in equity markets and recent regulatory initiatives will allow the gap to be closed in the next few years.”

Fitch points to the household deposit rate in emerging markets as backing this positive sentiment. In Indonesia, it notes, 77% of middle class investor assets are held in cash – money that can be put to work in funds.

Fitch also argues that the chance to tap China’s growing middle class is on the rise. Citing the Economist Intelligence Unit, it finds that 25% of Chinese households earn more than $10,000 per year, with the number expected to rise to 50% by 2015.

The report also finds that opportunities still exist in the developed markets of Singapore, Hong Kong, Korea and Taiwan, where an average of 55% of retail assets are held in cash and deposits. By comparison, the figure in the US stands at 27%.

Moreover, emerging Asian markets have room for more product. In China there were 1,173 domestic funds as at December last year for a population of 1.4 billion. By comparison, the offshore markets of Hong Kong and Singapore combined boast some 6,000 Ucits funds for sale.

But while the figures appear promising, the chief challenge for international asset managers lies in their ability to distribute their products onshore, acknowledges Fitch.

Foreign domiciled funds such as Europe’s Ucits scheme – popular in the offshore centres – are strictly regulated and restricted in China, Indonsia and Australia and disincentivised in Korea.

Hong Kong and Singapore clearly remain the fund hubs for the region, with combined AUM of $2 trillion as at end-2011. Some 70% of the Singapore-based AUM is managed on behalf of non-residents, compared with 63% for Hong Kong.

Comparatively, East Asia’s onshore funds market is estimated to be $1 trillion in AUM, with China accounting for the lion’s share at 41% and Korea 26%.

This dynamic could be set to change in light of last month's speech by Alexa Lam of Hong Kong’s Securities and Futures Commission (SFC) on a proposed mutual-recognition funds scheme with mainland China.

Fund houses including BlackRock and Franklin Templeton are already doing preparatory work in anticipation of China’s funds market opening up.

Yet they will be entering a market where competition is already fierce. By the end of last year there were 73 onshore asset managers in China, with more set to enter on the back of revisions to the Investment Funds Law in December, which permit a range of participants such as insurance firms and brokerages to launch mutual funds.

The market is dominated by the 10 largest asset managers, which hold 50% of China’s $460 billion in AUM. China Asset Management, for example, manages $27 billion in assets alone.

Outside of the retail market, Fitch finds that institutional investor AUM in East Asia has reached $2.5 trillion, concentrated among a small number of pension and sovereign wealth funds – a concentration that makes them difficult to access.

China’s two largest institutional investors, the State Administration of Foreign Exchange and China Investment Corporation, have a combined AUM of more than $1 trillion.

* In its report, Fitch Ratings examined the following markets: China, Singapore, Hong Kong, Thailand, Malaysia, South Korea, Indonesia and Taiwan.