When Zhonghai Trust began looking for an exit from its 48% stake in Da Cheng Fund Management -- one of the five remaining 'old 10' Chinese fund houses not in foreign hands -- one of the firm's shareholders, Everbright Securities, knew who to call.

The board at Everbright contacted a former employee, Zhou Liqun, now president at PICC Asset Management. Zhou also holds the key roles of chairman at PICC Investment Holdings and head of the investment committee at parent company PICC. Before taking the plunge into the insurance industry, he served in a number of roles, including director at Everbright Holdings, vice-president at Everbright Securities, chairman of Everbright Pramerica Fund, president of China Everbright Group and chairman of China Everbright Bank.

Zhou has long felt that China needs a better model for serving the retirement -- and thus investment -- needs of the country's generation of baby boomers.

In an interview with AsianInvestor in early February 2009, he envisioned that one day Chinese retail investors would also be able to invest in mutual funds from investment-linked insurance policies, as they can in the Hong Kong market. And he has lamented the slow business growth and lack of size of PICC's enterprise annuities business, which are the result of late market entry.

But he may now have another chance. Before the market closed on December 30, PICC confirmed it is buying Zhonghai's 48% stake in Da Cheng Fund Management for Rmb1.4 billion ($205 million).

Da Cheng is one of the original 10 managers that founded the Chinese fund management market in 1998-1999. On paper, the firm has a deep history and is the seventh largest manager in China, but it has stagnated in recent years. It has been losing experienced staff, leaving most of its strategies mediocre. (Morningstar ranks its funds two to three stars at best.)

In the past, the authorities' answer for stagnating old-10s that seemed big enough, but lacked the initiative to evolve to the next level, was to pair them with foreign shareholders, in the hope there would be injections of foreign investment skills or management rigour. Now that foreign firms have stakes in half the old-10s, the PICC/ Da Cheng deal looks like an attempt by the government to shake things up in a different way.

PICC already indirectly controls a securities brokerage and another old-10 company, which can deliver wealth management services. The firm's indirect investments in Shenzhen-based Guodu Securities and Beijing-based Harvest Fund Management are the result of a 32.35% holding in China Credit Trust it received from the Ministry of Finance in October 2008.

Subject to approval from both the China Insurance Regulatory Commission and the China Securities Regulatory Commission, PICC could gain a direct head-start in the fund business over other large rival Chinese insurers, such as China Life or Ping An. The latter has a pending greenfield joint venture with Singaporean bank UOB that it signed in January 2008; Ping An's designated CEO for the JV, Li Kenan, has been on the payroll since May 2008.

Opening up the insurance sector as a distribution channel for wealth management products is a long-term ambition shared by 19 foreign insurers operating in China. Many foreign insurers already own minority stakes in foreign-fund JVs. Many of these JVs were among the earliest foreign-fund JVs in the China market. They include Aegon-Industrial, AIG Huatai, Axa SPDB (with Shanghai Pudong Bank), CCB Principal, China Merchants (with ING), Citic Prudential, GTJA Allianz, and Penghua (with Eurizon).

PICC's Zhou shares the view that insurers will eventually be allowed to sell funds. He has said that regulators have expressed favourable views for future development.

However, the current laws regulating asset management in insurance stipulate that fund management firms are not allowed to source general-account assets or manage assets sourced from investment-linked policies sold by insurance companies.

Chinese insurance laws put security of funds before returns in the management of insurance assets. The definition of the fiduciary duties of insurers allows them to invest in funds, without entrusting assets to fund management companies as 'segregated assets'.

The management of insurance assets is the exclusive domain of an insurer's investment department or of the nine insurance asset management companies authorised to manage 80% of the industry's assets. (There are 60-odd life insurance companies and many more general insurers in China.)

PICC's own insurance asset management firm was the first to receive operational approval from the State Council of China, in 2003.

Recent experience elsewhere in the region has proved that investment-linked policies will not yield the kind of profit margins insurers expect, delivering just 1-2% annually on average, over several years. Fund managers, in turn, have been disappointed by the lack of open architecture offered by the fund-distribution model in insurance channels. Many insurers elsewhere have since refocused on better-yielding products, such as traditional whole-life policies.

That said, the desire for an all-in-one model has not cooled in China. There may still be many things that insurers cannot do, but there's no harm in PICC diversifying its business -- fund management is still a growing business in its own right.