UBS Asset Management and its new partner in China, Guotai Fund Management in Shanghai, are basing their relationship around getting Guotai's first open-ended mutual fund launched, according to people familiar with the deal.

The two signed a memorandum of co-operation at the start of the month. "As part of the agreement, UBS Asset Management is committed to providing Guotai with technical assistance including product development, while Guotai will help us to develop our brand name recognition and business in China," remarked Fu Teh-hsiu, head of UBS Asset Management's Greater China business in Hong Kong, at the time of the deal's announcement.

Foreign money managers looking for an entrance to China's mutual fund market are limited right now to technical agreements with either domestic fund managers or securities companies. UBS Asset Management decided to throw its hat in with a fellow fund manager, largely because the advent of open-ended mutual funds offers a real project that both partners can sink their teeth into. Working together on something concrete also lets both parties get a more hands-on feel for the strengths and limitations of their co-operation, according to people watching the tie-up.

Furthermore, the launch this week of the first open-ended mutual fund, the Xinchuang (Innovation) Fund by Shanghai-based Huaan Fund Management, aided by its foreign partner JF Asset Management, has made the open-ended mutual fund business a reality. Nanfang (China Southern) Fund Management, based in Shenzhen, has also been cleared by the China Securities Regulatory Commission (CSRC) to launch an open-ended mutual fund in the near future.

Interestingly, among the Chinese securities companies that are also establishing partnerships with foreign fund managers is Guotai Junan Securities, an important shareholder of Guotai Fund Management. Guotai Junan is co-operating with Dresdner RCM Global Investors. Apparently this did not impact Guotai Fund Management's link with UBS Asset Management, as it is independently run by management, particularly since Guotai Junan had to relinquish some of its ownership to other shareholders last year in the wake of a domestic fund management industry scandal.

FinanceAsia visited the offices of Guotai Fund Management in June. The friendly managers were very enthusiastic about the prospects of co-operating with foreign partners and developing open-ended funds. They showed FinanceAsia around their new offices, including one room with a thicket of cables dangling from the ceiling; this was to be the call centre. In fact, nearly every fund manager visited by FinanceAsia was in a similar state of development. But these companies are evolving with lightning speed, and market sources report the company, like most of its rivals, has since come a long way in putting the hardware in place to operate open-ended funds.

The more important unknown is when CSRC will approve Guotai or other managers to follow Huaan's example. Fund managers believe the regulators will want to be fully comfortable with Huaan's new fund before others can enter the market, but once that comfort level is reached, new entrants could be allowed in quickly. Huaan is also the only domestic fund manager to explicitly state its intention to form a joint venture fund company with JF Asset Management once China enters the World Trade Organization.

Another question is to what degree other companies can differentiate mutual funds from Huaan's. Fund managers believe there will be leeway for customization, including fund size, target investors and pricing.

The third unknown is to what extent Guotai will be able to help promote the UBS Asset Management brand name. For the moment, most of these partnerships see the bulk of assistance flowing from the foreign party, with promises of cooperation in the future. But market observers believe UBS Asset Management will look to get its name in the market as it helps Guotai with planning seminars and training sessions in the run up to its open-ended mutual fund launch.

There are currently 14 domestic mutual fund companies, although of these only 10 are considered established in this nascent market, having emerged from a wave of consolidation and reform in 1998. Of these, only two have yet to announce a partnership with a foreign asset manager, Boshi Fund Management and Jiashe (Harvest) Fund Management, both in Beijing (although in the past Jiashe did some work with Prudential of the United States).

The other tie-ups are: in Beijing, Changsheng Fund Management with ABN AMRO Asset Management, Dacheng Fund Management with Deutsche Asset Management and Huaxia (China Asset) Fund Management with Taiwan's JP Money; in Shanghai, Fuguo (Fullgoal) Fund Management with Bank of Montreal; and in Shenzhen, Nanfang with HSBC Asset Management and Penghua Fund Management with Invesco.