Onshore Sino-JV model described as dead

Both foreign and mainland fund houses see the old onshore joint-venture model as obsolete, AsianInvestor’s Art of Asset Management conference hears.
Onshore Sino-JV model described as dead

“The JV model for asset management in China is dead, but the JV model for Chinese companies going outside [of China] is still alive,” Young Zhao of Haitong international AM told an AsianInvestor conference this week.

Speaking at The Art of Asset Management summit in Hong Kong, Haitong’s head of product development and strategy was pointing out how times have changed.

He noted that Chinese managers had previously welcomed a tie-up with a foreign fund house to tap investment capabilities and risk management systems, but felt that these overseas partners had not generally contributed to improved performance. “During 2008 and 2009, [foreign JVs’] performance was even worse than local managers,” he added.

He expressed his belief that the JV model was only of interest nowadays for fund managers with ambitions to expand outside of China.

Interestingly, Gerard De Benedetto, chief executive at AZ Investment Management, suggested the China JV model was now similarly viewed as unattractive by foreign managers.

AZ Investment Management is a subsidiary of Italian firm Azimut Holdings, and he revealed that when the firm first decided to start a business in China it specifically chose not to take the JV route due to issues over management control. AZ operates out of Shanghai as a wholly owned foreign enterprise that can advise on funds but cannot launch any products.

De Benedetto suggested that while a joint venture might make a sound equity investment, it was not a way to build a fund management business in China.

Clearly this thinking is at odds with the approach international firms took when they first entered China back in the early 2000s, when finding a local partner was a priority.

In 2003, BNP Paribas teamed up with Haitong Securities to set up HFT Investment Management, and SG Group partnered Baosteel Group to form Fortune SG Fund Management; in 2005 Deutsche Bank took an equity stake in Harvest Asset Management, which now bills itself as the country’s largest Sino-foreign joint venture.

But now mainland fund houses are eager to expand overseas, with many having set up a subsidiary in Hong Kong to tap opportunities as China internationalises the renminbi.

The panellists talked about the advantage Hong Kong has as China’s offshore RMB centre in Asia. “You don’t need a hub in every country, Hong Kong is the natural step [for Rmb] to go out,” said Zhao.

He noted that while Singapore and Hong Kong tend to see each other as competitors in this regard, they need not because each centre should target different investors and money flows.

“It is possible that China will have one domestic Rmb centre, with three offshore centres in Asia, Europe and the US,” he added. “When the US has enough renminbi deposits, it can have another hub.”

Also under discussion was the reliability of onshore credit rating agencies in China, with some investors worried that onshore bonds have a higher default risk than offshore bonds, which receive international ratings.

In fact, the panellists felt that it would be safer to invest in onshore rather than offshore bonds. De Benedetto’s investment team covers both onshore and offshore bonds, and the trend shows that the default rate in Hong Kong is higher. “They are going to default in Hong Kong before they default in China,” he said.

Au King Lun, chief executive of BOC HK Asset Management, agreed that there might be fewer default cases in China since bond issues require regulatory approval, and as such are regarded as government guaranteed.

However, he argued that big pension funds still prefer investing in the offshore bond market, since they are covered by credit ratings with a greater degree of transparency.

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